JA Ball Limited (in administration) v St Philips Homes (Courthaulds) Ltd

This judgment deals with the claimant’s application for summary enforcement of an adjudication award dated 25th January 2022, by which the defendant, St Philips Homes (Courthaulds) Ltd, was ordered to pay the claimant £102,829.26 together with £5,570 interest and VAT, plus the adjudicator’s fees.

The claimant is represented by Robert Stokell and Chantelle Staynings, of counsel, and the defendant by Mark Chennells KC. The hearing was conducted by MS Teams on 23 September and 12 October 2022. The claimant relies upon three statements from Gregory McMahon and a statement from Gary Braathen, and the defendant, 2 statements from Gavin Hoccom and a statement from John Downer. There were also written opening submission and some closing submissions in writing, the last dated 26 October 2022.

The claim arises out of a contract for building works in connection with the conversion of commercial premises into 58 residential apartments at 256 Foleshill Rd, Coventry. The contract was a JCT Design and Build Contract 2016, with bespoke amendments, dated 1 August 2019.

The claimant, Ball, took possession of the site on 1 August 2019. The contract completion date was 31st August 2020. The initial contract value was £4,665,557 plus VAT. The defendant, St Phillips, has paid the claimant £4,327,217.74 of the contract sum, exclusive of VAT.

Ball did not complete the works due to its financial difficulties. On 23^rd September 2020, it informed St Phillips that it would not complete the project and it ceased work that day. Ball’s directors placed the company into administration on 30th September 2020. St Phillips has since completed the works.

The stated purpose of the administration is the second statutory objective, namely, to achieve a better result for the creditors as a whole than would be likely if the company were wound up. The administrators are Michael Roome and Dean Nelson. Their reports of November 2021 and May 2022 indicate that the anticipated dividend to unsecured creditors will be 2 or 3 pence in the pound. They have yet to issue a notice of distribution which would trigger rule 14.24 of the Insolvency Rules, thereby imposing the equivalent of an insolvency set off. In such circumstances, the parties’ entitlement to claims against each other would be converted to one claim for the positive balance arising from the mutual dealings between the parties.

The joint administrators are pursuing this claim through an agent, Pythagoras Capital Limited, which is acting under a Damages Based Funding Agreement (“DBA”). Pythagoras has instructed Circle Law LLP, solicitors, to act for the claimant. Those entities have a common shareholder in Gregory McMahon and a familial connection in that Mrs McMahon owns 50% of the shares in Circle Law LLP.

Ball served a Notice of Adjudication on 16 December 2021 and the adjudication referral on 19 December 2021. It claimed £221,790.36 plus a loss of profit for breach of contract or, alternatively, £439,556.09, exclusive of VAT, as the balance of the contract price in the event that there had been no breach. It also sought a valuation of the final position as between the claimant and the defendant under the contract. The defendant denied that any money was due, claiming that it was owed sums by the claimant. The adjudicator’s award of £102,829.26 was expressed to be a balance of adjustment of the contract sum and allowance for the defendant’s cross-claims.

The Defendant resists enforcement by summary judgment on the following grounds:

The starting point is that a valid adjudication award will be enforced by an order for summary judgment save in limited circumstances. A recent expression of the court’s approach is to be found in Bexheat Ltd v Essex Services Group Ltd [2022] EWHC 936 (TCC) where O’Farrell J said:

This follows from the policy behind the adjudication provisions in the Housing Grants Construction and Regeneration Act 1996, encapsulated in the motto “pay now, argue later”: Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) [2020] UKSC 25 per Lord Briggs at [12]. As Dyson J explained in Macob v Morrison [1999] CLC 739 at pp. 743-744:

The current case is one in which St Phillips puts forward a cross-claim. In the ordinary course, a cross-claim which overtops the claim and has a realistic prospect of success would prevent the entry of summary judgment. That is not the case in the face of an adjudication award. The relevant principles were set out in Squibb Group v Vertase FLI Ltd [2012] EWHC 1958 (TCC) where, at [11], Coulson J, as he then was, said:

It is common ground that adjudicators must follow the rules of natural justice. The relevant rule in this case is that “the person affected has prior notice and an effective opportunity to make representations before a decision is made”: AMEC Capital Projects Ltd v Whitefriars City Estates Ltd [2004] EWCA Civ 1481 (TCC) per Dyson LJ at [14]. Natural justice challenges have to be examined critically, however, if the purpose of the 1996 Act scheme is not to be undermined; Amec per Dyson LJ at [22].

The relevant principles to apply are set out in Cantillon v Limited Urvasco Limited [2008] EWHC 282 by Akenhead J where he said at [57]:

The line between breaching and honouring the rule is exemplified in two cases to which I was referred. In Primus Build Ltd v Pompey Centre Ltd [2009] EWHC 1487 (TCC) Coulson J was considering an award for loss of profit which the adjudicator calculated by reference to documents that the parties had said should be ignored. He held that the adjudicator’s unheralded use of the documents vitiated the award and gave the following guidance at [40]:

In AECOM v Staptina [2017] EWHC 723 (TCC) the reference to the adjudicator was expressed to be for the determination as to whether, as a matter of principle, AECOM was entitled to make deductions from Staptina’s application. Her decision was that the deductions could be made and she went on to rule as to how the sums to be deducted were to be assessed, but these were limited by the sum it would have cost Staptina to carry out the work. AECOM challenged the decision on the basis that the adjudicator should have answered the question as to whether deductions could be made in principle either in the affirmative or negative and it was deprived of the opportunity to make representations on the assessment issue. Staptina argued that the question wasn’t amenable to such a clear-cut answer. The decision as how the sums were to be assessed amounted to a qualified answer to the question posed, i.e. the sums could be deducted provided they were limited to the extent determined.

Fraser J held that the adjudicator was entitled to come to the decision she did without giving the parties a further opportunity to address her on the assessment issue. He relied upon the judgment given by Edwards-Stewart J in Roe Brickwork Ltd v Wates Construction Ltd [2013] EWHC 3417 (TCC) where he said at [24]:

Mr Stokell argues that what was said in Roe Brickwork and its application to the facts of AECOM are apposite in this case and should determine the outcome in the claimant’s favour. Mr Chennells says that this case is more like Primus in that what has happened is that the referring party could not make out its claims, as put, but the adjudicator has found an alternative path to their success. He says that I should adopt what is the “acid test”, as it was described in Van Oord UK Ltd v Dragados UK Ltd [2022] CSOH 30 at [26], a decision of the Outer House of the Court of Session, where Lord Braid said:

In order to understand the way in which the parties put their cases in the adjudication it is necessary to start with the provisions of the contract dealing with termination and payment. These are as follows:

For the purposes of these conditions:

Rectification Period: the period stated as such period in the Contract Particulars (against the reference to clause 2.35) in relation to the Works…”

A summary of the reference appears at paragraph 8 above. The basis of the case that there had been a repudiatory breach of contract on the part of St Phillips was that it had not served a notice to terminate the contract in accordance with clause 8.5.1, thus it was not entitled to employ others to complete the works as provided for under clause 8.7.1, and was thereby in breach of contract. Ball said that it had accepted the repudiatory breach by not returning to site to complete the works. The alternative claim was put on the basis that if St Phillips had not incurred completion costs, i.e. it had not employed someone else to complete the works, Ball was entitled to the balance of the contract price pursuant to clause 8.7.5.

The defendant’s response to the reference was that:

Ball’s Reply alleges that as St Phillips had admitted employing others to complete the works, it has been established that it was the party in repudiatory breach, which was accepted by Ball, for the reasons given in the alternative claim in the reference. It said that St Phillips’ argument that a final account was not due was incorrect because of the termination of the contract by breach. As a result, clause 8.7.4 did not apply and a final account was due. Clause 8.12 applied instead, as this makes provision in the event of termination by the contractor. Under that clause, Ball was entitled to payment for the works completed but for which it had not been paid, which was calculated as £221,790.36. In response to the damages claim by St Phillips it pointed to a lack of evidence to support the claim for remedial costs and the absence of an entitlement to completion costs, which it alleged were exaggerated, where the contractor terminated the contract.

In its Rejoinder, St Philips disputed certain factual assertions made by Ball to the effect that it did not know of the use of other contractors until shortly before it allegedly accepted such use as a repudiatory breach. At 2.4 of the Rejoinder St Philips said, in relation to the fact that Ball admitted that St Phillips had incurred considerable completion costs, “The issue is whether the contract governs the calculation of those losses or whether the common law does.” It also responded to the following questions from the adjudicator, sent by email to the parties on 7 January 2022:

St Philips’ answers were to the effect that that as regards (a) and (e) the provision preserved the parties common law rights, including the defendant’s right to complete the works, (b) clause 8.7 permits the employer to complete the works using others but it does not prevent it from doing so. If the contract was not terminated under clause 8.7 St Phillips were free to complete the works using Ball’s management and sub-contractors, which is what they did, but terminating Ball’s employment; they pointed out that clause 8.5.3 gives effect to clauses 8.7.3 to 8.7.5, a point repeated in response to question (c). As to (d), no further sums are due because clause 8.7.3 says so, and (f) the effect of 8.3.1 was that the contract was not terminated though Ball’s employment was, but that had no effect on the calculation of sums under clause 8.7.4, under which no sums were yet due, and clauses 8.7.3-8.7 applies to govern the termination account.

Ball’s answers to the questions were in more general terms. In an email dated 7 January 2022 it said that the position, presumably meaning the outcome of the reference, was dictated by either the common law or clause 8.12 of the contract. The effect of 8.3.1 was that Ball retained its common law right to terminate, regardless of clauses 8.4 to 8.7 “as a result of JA Ball’s (sic) repudiatory breach of contract.”

Mr Bingham held that Ball’s employment had not been terminated, either by a notice of termination under the JCT agreement or by mutual agreement. Neither did St Phillips accept Balls repudiatory breach of contract. On the contrary, it affirmed the contract and sought to apply the JCT terms. Whilst he accepted that St Phillips could only employ others to complete the contract if it terminated the employment of Ball, he held that Ball did not accept the claimed repudiatory breach by St Phillips as terminating the contract. Thus, by this point, he ruled out the claim for damages for breach of contract. He, however, proceeded to make an award for payment under the contract but not on the basis advanced by either party.

The adjudicator’s explanation for the basis of his award appears in a list of issues which he had identified for decision. These were not taken from any list of issues provided by the parties.

Mr Chennells argues that whilst the material upon which the decision was based was before the court, namely the contract, the issue upon which the case was decided was not fairly canvassed in that no-one had previously suggested that payment for work could be made under the contract other than in accordance with its express payment provisions. Ball had said that the contract had been discharged by its acceptance of St Philip’s repudiatory breach. Because the adjudicator found against Ball on the repudiation point, it could not succeed on its case. What the adjudicator has done is to identify an alternative way for Ball to succeed which was not notified to the parties till the issue of the decision.

Neither can it be said that the approach taken by the adjudicator arose from the case being run by St Philips, which was to the effect that payments under the contract, following termination or insolvency of the contractor, were governed by clauses 8.7.4 and 8.7.5, the consequence of which was that the claim for payment was premature.

Mr Chennells further argues that albeit that the contract document was material before the parties and the adjudicator, the defendant cannot be expected to foresee every argument which may be based on the terms of that document. The issues of which each party had notice are those which are apparent from their respective arguments. These frame the scope of the issues for determination.

As to the materiality of the breach of natural justice, Mr Chennells says, it is clearly material as the decision to make an award under the contract other than under clause 8.7.5 was central to the decision and had this approach been canvassed, and the reliance upon termination as a trigger for clause 8.7.1 and the suggestion that clause 8 under the contract fell away, St Philips would have countered this by pointing to the provision in clause 8.5 as to the application of clauses 8.7.3 to 8.7.5, i.e. the payment provision, in the event of an insolvency whether or not notice of termination was served.

Mr Chennells says that he does not need to satisfy me that the defendant’s case on this issue would succeed so as to render the breach material. He relies upon Corebuild Limited v Mr Tom Cleaver and another [2019] EWHC 2170 (TCC). In that case, Adam Constable KC, sitting as a judge of the High Court, held at [24] that there had been a breach of justice where the adjudicator had determined the reference “on the basis of a factual finding which had not been argued for, which there was no evidence or submission in support of, and upon which the Defendants had had no opportunity to comment or adduce evidence” He went on to consider whether the breach was a material one. In that regard, he said, in reliance upon ABB Limited v BAM Nuttall Limited [2013] EWHC 1984 (TCC):

Mr Stokell argues that the substance of the adjudication was about an assessment of the net balance between the Ball and St Philips. In that context the latter had a full opportunity to make submissions as to which contractual terms applied and why. He had received detailed submissions on clause 8.7.4 but nevertheless found that a balance was due. Clauses 8.4 to 8.7 of the contract are not straightforward and it would be a “high test and penalty”, by which I took him to mean, too exacting a test, if an adjudicator who made an error when construing these terms could be said to be in breach of natural justice.

He says that St Philips had notice of the approach the adjudicator may take by the questions about the effect of clause 8.3.1 sent to the parties on 7 January 2022. Thus, as the relevant material and issues to which they gave rise had been fairly canvassed before the adjudicator, there was no breach of natural justice; he relied upon that passage in Roe Brickwork Ltd at paragraph 17, above. He sought to distinguish Corebuild (above) as there the adjudicator had made a decision on a factual basis for which there was no evidence.

In the course of his oral reply to Mr Chennells’ submissions, Mr Stokell took a materiality point. He argued that clause 8.7.4 of the contract does not provide that a final account cannot be taken till the end of the defects liability period, as it refers to St Philips preparing an account within 3 months “following the completion of the Works and the making good of defects…). For these purposes the two year defect liability period is irrelevant. Accordingly, even if the adjudicator had invited submissions on the approach he ultimately took in making his award, it would have made no difference, as, under the contract, he could deal with the balance.

I accept Mr Chennells’ observation that the issues which the parties can be expected to address are framed by those which they raise in the adjudication, albeit to that must be added any issues of which the adjudicator has given the parties notice.

In this case the issues identified by the parties were whether Ball was entitled to a payment of damages at common law due to St Philips’ breach of contract, or, if there was no breach, payment under clause 8.7.5, following a determination under clause 8.7.4 (Ball’s position), or whether it was the defendant which was entitled to damages for Ball’s repudiatory breach of contract, and that an account for the balance was premature as the period after which such an account could be taken was still current, that being the effect of clauses 8.5.3 and 8.7.4 (St Philips’ position).

Mr Chennells also argues that from the time of Ball’s reply, the issues were further narrowed as it elected to proceed on the basis that the claim was for damages for breach of contract in the light of the defence admission that other contractors had finished the works. Whilst the emphasis placed on repudiatory breach is mirrored in the extent of the evidence devoted to this subject before the adjudicator and the fact that 4 of the 8 issues he identified turned on this issue, I do not see evidence of an election to abandon the claim for payment under clause 8.7.5 of the contract. All that Ball was asserting was that its claim for repudiatory breach was the stronger limb of its claim.

The arguments I have outlined could not put St Philips on notice that in order to defend its position it needed to argue that there was no way that a payment was due under the contract other than in accordance with the clauses which both it and Ball referred to in their Reference. Whilst it did have the opportunity to identify the clauses giving a right to payment and to argue that the commencement of the machinery for so doing was premature, that was in a context in which the other party was claiming that payment under that machinery was now due, not that there was some other way in which payment under the contract became due, i.e. by clause 8 “falling away”. As between the parties, the Reference clearly proceeded on the common assumption that Ball’s claims to a payment were at common law, following termination of the contract by an accepted repudiatory breach by St Philips or under clause 8.7.5 of the contract.

The reliance upon the questions of 7 January 2022 as giving St Philips notice of the issue they needed to address is misplaced. It asks about the effect of clause 8.3.1 in various circumstances. It does not seek comment about, or forewarn the parties as to, the Adjudicator’s approach to the question as to whether clauses 8.7.3 to 8.7.5 apply or to there being circumstances in which clause 8 “fell away”, leaving some other, unidentified or residual right to payment.

It follows that this is not a case in which the Adjudicator has taken some intermediate position as between the parties or based his decision on, not only material before him, but also issues arising therefrom that had been fairly canvassed between the parties. He decided the case on a novel basis of which neither party had notice and about which St Philips, in particular, should have been given an opportunity to respond. To reach a decision in this way on a determinative point is a breach of natural justice.

I do not accept that the breach was not material, it clearly was. Following Corebuild, and ABB Limited before it, a breach is material if the point which St Philips has not be able to argue has a reasonable prospect of success. It is not for the court to decide whether the point succeeds unless it is so obvious that it should. The rationale for such an approach is that the court should not second guess what the adjudicator would make of the point, for the decision is his, save where it is unarguable, in which event it could not be material.

Mr Stokell does not argue about the existence of the principle to be found in Corebuild. In essence he is saying it was applied in that case to more extreme facts. Nevertheless, he seeks to argue materiality on the basis that the defects liability period was irrelevant to the operation of clause 8.7.5. Thus, if the adjudicator had based his decision on what was argued before him, i.e. applied clauses 8.7.5, he would have been justified in making an award.

The first point in response to the argument is that the Adjudicator did not accept that payment was due to Ball under 8.7.5 as he held that clause 8 fell away. He did not decide the case on the period for producing the account point, nor does it seem to have been argued before him by Ball, or, indeed, until it was raised in response to the defendant’s submissions in this case. The second is that St Philips’ argument on this point has a realistic prospect of success. Clause 8.7.4 times the account to a date three months after the completion of works and the making good of defects. Clause 2.35 provides for the giving of instructions to cure defects during the Rectification Period, which is defined as period of 2 years from the Completion of the Works, the original contractual date for completion being 31 August 2020. It is arguable, with considerable force, that this must result in the time for an account provided for under the contract following the Rectification Period.

For completeness, though this was not disputed by Mr Stokell, St Philips have a reasonable prospect of succeeding in the argument that in the case of an insolvent contractor, the clause 8.7 machinery for payment applies, whether or not notice of termination is served, as clause 8.5.3 applies 8.7.3 to 8.7.5 as if a notice of termination had been served. Termination is not a prerequisite. Thus, the failure to alert St Phillips to the argument that clause 8.7 does not apply because clause 8 falls away was a material breach of natural justice.

In the light of my findings, the decision is unenforceable by reason of a material breach of the rules of natural justice.

In view of my conclusion as to the natural justice point it is not necessary to consider the impact of the claimant’s administration and the champerty point. In case I am wrong as to natural justice, however, I will deal with these arguments.

The fact that a company has entered into an insolvency process can lead the court not to grant summary judgment. In Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] B.L.R. 522, the Court of Appeal held that a company in insolvent liquidation which has obtained an adjudication decision in its favour will not generally obtain enforcement by summary judgment. The reason for such an approach was explained by Chadwick LJ at [35] where he said that:

More recently, in Bresco Electrical Services Limited (in liquidation) v Michael Lonsdale (Electrical) Ltd [2022] UKSC 25 , the Supreme Court held that a company in liquidation has both a contractual and statutory right to pursue adjudication even though the dispute relates to a claim affected by insolvency set-off: see Bresco per Lord Briggs at [59] and John Doyle Construction Ltd v Erith Contractors Ltd 2021 Civ EWCA 1452 per Coulson LJ at 86. Lord Briggs went on to make obiter observations on summary enforcement. He said:

These passages were considered by the Court of Appeal, and applied, in Doyle (above), with the caveat that Lord Briggs, by his third example as to where the enforcement of an award may be available, did not mean that a company in liquidation was entitled to a judgment on the basis of a provisional decision, which is the nature of an adjudication award; see Coulson LJ at [90]-[91] and Lewison LJ at [143]-[145]. At [88] of Doyle Coulson LJ said:

In Straw Realisations (No.1) Ltd v Shaftsbury House (Developments) Ltd [2010] EWHC 2597 Edwards-Stewart J was faced with a case in which the claimant had been put into administration following two adjudication awards. The administrators had yet to serve a notice under IR 14.29 of an intention to make a distribution or declare a dividend to creditors, which, by IR 14.24, would have invoked a statutory set-off, similar to that which applies where there is a liquidation under IR 14.25. It was argued by the claimant that nothing short of liquidation was sufficient to bring about automatic mutual set-off with the effect that enforcement of the adjudicator’s decision should be refused. The judge held that one award was final and binding due to want of notice under paragraph 23(2)(a) of the Scheme for Construction Contracts, whereas the other was not. He gave summary judgment on the former, but stayed enforcement, and refused judgment on the latter. As to the impact of an administration order in such a case Edwards-Stewart J said, at [87-88],

Having reviewed a number of authorities, Edwards-Stewart J said, insofar as relevant to this case, at [89]:

On any view, Ball is highly insolvent. The administrators forecast that the unsecured creditors, who amount to just over £2m in value, can only expect 2 or 3 pence in the pound. It is clear beyond doubt that it could not repay the award in circumstances where St Philips succeeds on its cross-claim. Bouygues, Bresco and Doyle , establish that the robust approach to the enforcement of adjudication awards must give way to the insolvency regimes when there is a tension between the two. They identify two ways in which this can arise. First, in the case where the parties’ rights are converted by the insolvency regime into a statutory set off, there should be no enforcement unless, on the facts, it is clear that there is a positive balance owing to the claimant. Second, where the effect of insolvency is that enforcement of the award would lead to the payee losing its security for a cross-claim there should be no, or a stay on, enforcement, unless the court is satisfied that there is some worthwhile and suitable safeguard in place to ameliorate that hardship.

Mr Chennells is correct in his assertion that St Philips’ claim will be for the whole of the sums it is owed, it will not be limited to claims just sufficient to match the award. It will need to deploy its whole claim as some parts may not succeed. Furthermore, faced with a claim for the full sum, it can be expected that Ball will wish to rely upon its full claim as it, too, is not bound to accept the adjudication award as final and may consider that it has a better chance of overtopping the St Philips claim if it also pursues those claims rejected by the adjudicator. Mr Stokell relied on a reference in Meadowside at [76] and [84] to the effect that the defendant will only be able to recover by litigation a sum enough to extinguish the award and will have to prove for the rest. That does not mean that the litigation must, or will, be limited as he suggests, it merely makes the practical point that after the court has determined the balance, the most St Philips can achieve is to reduce the balance to nil and it must look to proving in the administration insofar as the amount awarded exceeds the balancing figure.

The consequence of these conclusions is that the rules relating to insolvency do have an impact on this case which is in tension with the adjudication regime. As in Straw , the principle of pay now and argue later could not operate at the stage that the administrators were refusing permission for St Philip’s claim. Although they have changed their mind after the first day of hearing, by giving permission to litigate, they have limited that to a claim to overturn the adjudicator’s award. It is unclear whether that formulation is permission to the defendant to litigate its full claim, so as to have the maximum chance of overtopping the award or restricted to a claim for a balancing figure. Mr Stokell says that this is the correct form of permission based on his argument that any claim beyond that will have to be proved in the administration. Not only is he wrong, but it supports Mr Chennells’ assertion that the limited permission is intended to restrict the defendant in proceeding with its full claim. For this reason alone I would have refused summary judgement.

Mr Stokell said that Straw was no longer good law in the light of Bresco . Subject to the modification I have outlined above, it is, as it is consistent with the underlying principle of preferring the insolvency regime to that of adjudication where justified on the facts.

Whilst I have not been given a hard example of the practical effect of such limitation, the courts have experience in such cases of a party arguing that since the best the other side can achieve is a reduction of the insolvent party’s positive balance to nil, they should be restricted to a pared down number of issues on the grounds of proportionality, usually supported by an argument that if they think their claims are so strong, why should there be any complaint to this approach. It has the capacity to put the solvent party at a disadvantage.

The administration here will have the result that any money paid to Ball under the award will go in the expenses of the administration and any dividend left to the creditors, thus if St Philips were required to pay they will lose the security of the award for its cross-claim. If that were the only impact of the administration it would be an argument for a stay of execution rather than refusing judgment.

It is difficult to find a clear guide from the cases as to the principles governing a refusal of judgment as opposed to stay, where the only harm to the defendant is the loss of the security for its cross-claim. In liquidation cases, it has been said that there should be no judgment due to the conversion of the parties’ rights into the statutory set off, Bouygues [35] and Doyle at [144]-[145] , unless there is no realistic defence of set-off to the whole or part of the claim; Bresco [65] , but, as is clear from Bresco this approach is fact sensitive. There may be other reasons for refusing judgment, such as where it is realistically arguable that the nature of the funding agreement gives rise to an abuse of process, as in Meadowside.

If the only issue was the loss of security, subject to my conclusion as to the worth of the Pythagoras guarantee and the utility of ring-fencing, I would have given judgment on the award but imposed a stay for a limited period, say 6 months, subject to extension, to enable the defendant to bring its claim. This would recognise the purpose of the adjudication regime, at least in part, but put the onus on the defendant to argue later or, in default of argument, pay. To do otherwise would render the adjudication pointless as it would enable the defendant to walk away and trust that the administrators of this highly insolvent company would give up the chase. It would be wrong for insolvency law to encourage a result which may be to the prejudice of innocent creditors and could encourage debtors to delay payments if the creditor’s insolvency was on the horizon, as was recognised by the court in Swissport (UK) Ltd (in liq) v Aer Lingus Ltd [2009] BCC 113 at [33] .

My reasons for imposing a stay would have been reached on the Wimbledon v Vago principles as all the factors favouring a stay exist in this case and those which do not are absent. The claimant cannot repay the award and its financial state has not been brought about by the defendant, nor is there evidence that it was in this state when the contract was made.

I next need to deal with the question as to whether a stay ought to be imposed in the face of the offer of ring-fencing and the guarantees. In a case such as this, the court is trying to balance the competing interests of the party with the award and the importance afforded to an effective adjudication regime against the risks to the defendant from the operation of that regime due to that governing insolvency.

I would not make an order for which there was not a good reason. If it were the case that there was a doubt as to the defendant’s ability to meet the award at the conclusion of litigation, that would be a good reason to order a payment surrounded by the elaborate structure of ring-fencing and guarantees. That, however, is not this case. I do not see the purpose for ordering the defendant to pay money over, only for it to be held in a ring-fenced account. As was pointed out by Coulson LJ in Doyle at [58] and [100], the sterilisation of money in this way runs counter to the underlying philosophy of adjudication.

On a more general note, it is also undesirable that it becomes a feature of every adjudication enforcement in which there appears to be no risk to the claimant from a stay of enforcement that there has to be detailed evidence and argument as to the worth of a guarantor and guarantee, the level of the defendant’s estimated costs, the form of the ring-fencing undertaking and arguments about champerty and abuse of process. What should be a streamlined and speedy procedure, in keeping with the ethos of adjudication, quickly becomes bogged down where there is a proliferation of issues, as happened this case. It was listed for 2 hours but took one and a half days, stretched over several weeks, and involved two rounds of written submissions.

With that introduction, I look at these issues, as briefly as possible, given my decision as to the outcome of this application.

The guarantee is limited to the extent that the defendant’s “proceedings are successful in overturning the Adjudicator’s Decision.” For that reason alone the guarantee is inadequate for the same reason that the administrator’s limited permission to litigate is. It does not give full costs protection to the defendant to the extent of the action it proposes to bring to defeat the claim based on the award.

When looking at the worth of the guarantee, I first need to look at the extent of the potential liability. The defendant’s costs budget for its claim includes, in round figures, £84,000 of incurred costs and £244,000 of estimated costs, a total of £329,255, to which is to be added the costs of the budget and budget process, a further £10,000. As I accept that the sums at stake in this ligation are likely to total £700,000, the figures alone are not disproportionate. Neither are they when the range of issues to be tried is taken into account. The precedent H does not include any sums which seem patently too high. Perhaps statements of case could be reduced and there would be a question mark over the incurred costs as the estimated costs appear to show that the defendants are starting from scratch, for example work has yet been done on witness statements. But even deducting 20% to allow for challenges to the budget and incurred cost, the amount of costs at stake are in the order of £270,000.

The Aviva guarantee, which also suffers from the same limitations as that of Pythagoras, only covers the second £150,000 of costs if Pythagoras pays the first £150,000. The question which arises is whether the latter is good for that figure. The latest filed accounts, those for June 2020, do not support that it has an ability to pay this figure, given capital reserves of only £98,730. Set against that are the reserves shown in the capital account, but these fluctuate wildly, as to which there has been no explanation.

Mr McMahon, in his third statement, says that the shareholders of Pythagoras have unencumbered property and cash to support the company and stand behind the guarantee. It is said this will be enough to cover any costs claim, though no detail is provided. He claims that the business is on the point of expanding fourfold and that based on his experience, he forecasts that his company will collect £3m in fees in the next 12 to 18 months from the 186 debts it is pursuing for 30 construction companies. The company is retained on a contingent basis, thus its income is dependent upon success. He says that the cost base is fixed, by which I take him to mean that the additional work he expects will not affect cash flow. That does seem improbable where his company is funding litigation for which disbursements will be necessarily incurred; the issue fee alone can be £10,000 and even if litigation is not required, there are costs associated with adjudication. I would have expected to see a cash flow forecast if it is to be maintained that Pythagoras will be in a position to cover at least £150,000 of costs at the conclusion of the defendant’s claim. Particularly where it is alleged that the business is due to expand to the extent suggested.

Mr Chennells posed the question, if Pythagoras is so financially sound, why does it not obtain a guarantee for all of the costs from an unimpeachable third party or ATE policy. That would have avoided a debate as to worth of the company. There is force in that point. Stepping back, on the selective evidence produced by Pythagoras and raw assertion by Mr McMahon, and taking into account the only published accounts, I am not satisfied that there is a high level of certainty, which was the test applied in Meadowside at [136]-[137], that the company will be able to meet the first £150,000 of costs so as to trigger the Aviva guarantee.

Lastly, I come to the issue of champerty and abuse of process. The starting point is that a damages based funding agreement is champertous unless it complies with the DBA Regulations. Thus, the burden is on Pythagoras to show that it comes within the protection of the regulations.

As to the three factors which are said to amount to a lack of compliance, I have not been referred to any authority on what constitutes compliance in these regards. The main argument centred around the questions as to whether or not Pythagoras would take more than 50% of the payment as it would recover what it called, external costs, to include counsel fees in addition to 50% of the recovery. If one was to look at the terms of appointment agreed in April 2021, one would conclude that it would incur, and thereby recover, counsel’s fees. Circle Law has filed a letter to say that this will not be the case as counsel will be paid before the spoils are divided between the funder and the administrators.

There is no witness statement explaining how counsel’s fees are to be paid or who is responsible to fund counsel. This is against an evidential background in which Mr McMahon said, in his third statement, that Pythagoras paid £300,000 of counsels’ fees in Bresco in the Supreme Court. It was on the winning side in that case, which gives rise to the question as to why they paid these fees if these are dealt with by the solicitor deducting the fees before the proceeds of the litigation are divided. The inference to be drawn from the fact that Pythagoras is funding the litigation and is the agent of the administrators to pursue the litigation is that it has agreed to be responsible to pay counsel’s fees, as if it were the client, and any payment out of the proceeds to counsel represents a discharge of its liabilities and thus to be treated as a payment made by it. For that reason, without seeing the agreement governing the payment of counsels’ fees as between Pythagoras and Circle Law, I cannot be satisfied that the payment to counsel is not on Pythagoras’s behalf and thus should be included within its 50% recovery. These two entities are entitled to withhold the agreement if they wish, but it comes at the cost that I cannot be satisfied that there has been compliance with the regulations in this regard.

As to the letter of 10 October 2022 setting out the Pythagoras’s intention in realising the collected debt and including an agreement to reduce to 50% the sums ultimately recovered by it, in order to avoid a breach of the regulations, this seems to be a side agreement to delete terms from the April 2021 DBA if its provisions as to remuneration would breach the DBA and a fresh agreement to reduce the amount recoverable under the DBA to ensure that there is no breach. The letter of 10 October 2022 is not in the form of a DBA, nor does it comply with the regulations, The only DBA in this case is the April version. Mr Chennells argues, and I agree, that if the funder wishes to operate under a DBA in line with the October letter it will need an amended DBA or a new agreement, but that would commence from the date of amendment or replacement. Thus, the DBA as it stands remains non-compliant. That is sufficient to find that the damages based agreement was champertous.

The other objections are that the claim was not identified and the reason for setting the amount of the payment was not given. The former was not pursued in argument but the latter was. The question which arises is whether the obligation to provide the reason for setting the amount of the payment level agreed is satisfied by stating in bald terms that it is because of the risk. The requirement is stated as the obligation to specify “(c) the reason for setting the amount of the payment at the level agreed”.

In the absence of authority, I cannot see that the reason given on the agreement can amount to compliance. It is the reason for the level agreed which must be provided, that is what the regulation states, not merely the reason for taking any percentage of the recovery. It is axiomatic that in entering into a DBA the funder is taking a risk as recovery is contingent on success. The level of information required by regulation 3 must require that the funder explain why it is taking a particular percentage. Furthermore, if that was not explicit in the wording of regulation 3(c), it should be given a purposive construction. The regulations both protect the consumer by informing them and any authority with an interest in the matter, such as a professional regulator and the court, why the percentage recovery has been set at a particular rate. The reason, therefore, must answer that question. If it were otherwise the consumer and others would not know whether the percentage agreed was justifiable.

Finally, the question has to be asked as to whether it is realistically arguable that non-compliance amounts to an abuse of process. Mr Stokell dealt with Mr Chennells’ arguments on this point in his final written submissions. He said there was not abuse for reasons he gave but which only went to the question of compliance. He did not seek to answer Mr Chennells’ arguments on this point. This is an issue of some difficulty. I was not referred to any authority other than what was said in Meadowside where this aspect of the law was clearly dealt with in substantial detail. In that case the judge decided that the matter of abuse could not be dealt with, largely, if not wholly, as a result of Pythagoras’s refusal to disclose the terms of the agreement.

In this case I have seen the agreement. Without lengthening the judgment, on what is not a determinative point by reciting the factors he took into account, from the authorities cited to him, they are set out at [123] Meadowside, and whilst I have some reservations arising from the fact that the funder is controlling the litigation due to its connection with Circle Law and its position as agent for the administrators, the DBA does not amount to trafficking in litigation. It is important that administrators and liquidators have a source of funds to pursue the enforcement of claims and such support should not be confused with trafficked litigation even where, as here, the benefit to the funder is substantial when compared to that to individual creditors, to whom it is likely to be slight. The insolvent company has a real interest in recovering the sums due, so there is nothing improper in the purpose of this litigation. Whilst I do not know how much funding Pythagoras have provided to compare it to the gains it can make, which can be a relevant consideration, the fact is that, whatever the success, the gains will be modest. There is unlikely to be an unreasonable disparity. I am not persuaded that it is realistically arguable that the DBA and Pythagoras’s part in this litigation may be an abuse of process. The arrangement here seems to be a justifiable one between insolvency practitioners lacking funds to pursue the insolvent’s debt and a funder, save for the failure to comply with the DBA, which is not on its own an abuse.

The award will not be enforced as the adjudicator failed to comply with the rules of natural justice in coming to his award. Had this not been the case, I would have given judgment but stayed enforcement for 6 months, or until further order, to enable St Philips to bring its cross-claim. The application for summary judgment is dismissed.