Where an insolvent party has the benefit of an adjudication decision, it must provide sufficient security for the Defendant’s legal costs of the action. The Technology and Construction Court decision in Midas Construction Ltd (in Liquidation) -v- Harmsworth Pension Funds Trustees Limited provides an example of application of established principles, in the context of plural adjudications.
The case demonstrates the difficulties that can arise for an Employer in insolvency and termination connected with adjudication and enforcement. In this case, the court was wary of the enforcing insolvent’s party attempt to invoke the court’s case management powers to stage the legal process, which would have resulted in a benefit to the enforcing party.
Background facts
Midas Construction Limited (In Liquidation) (“Midas”) entered into a JCT Design and Build Sub-Contract 2011 (as amended) with Harmsworth Pension Funds Trustees Limited (“Harmsworth”) on 9 July 2018.
Under the contract, Midas was engaged as Harmsworth’s contractor to carry out works at a development at Unity Street, Bristol. The contract value of the works was £24,087,347.50 plus VAT.
Midas became insolvent before completion of the works, resulting in the termination of the contract.
Clause 8.7.4 of the contract provided the standard mechanism for determining, in the event of Midas becoming insolvent, whether sums were owed by either party following completion of the works. Harmsworth was required to issue a statement outlining:
- the amount of expenses properly incurred by the Employer and any direct loss and/or damage for which the Contractor is liable, whether as a result of termination or otherwise;
- the amount of payments made to the Contractor; and
- the total amount which would have been payable for the Works in accordance with the Contract.
Clause 8.7.5 provided that “If the sum of the amounts stated under clauses 8.7.4.1 and 8.7.4.2 exceeds the amount stated under clause 8.7.4.3, 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.”
Taking the component parts of the statement in turn, Harmsworth’s statement asserted that Harmsworth had incurred £226,280.00 and that Harmsworth had paid £24,598,740.50 to Midas. Finally, the statement provided that the total sum payable in accordance with the contract was £24,825,020.50 – a sum equal to the other two figures combined. Inputting these figures into the clause 8.7.4 statement provided that no further sums were owed to either party, as the sum under clause 8.7.4.3 was equal to the total of the sums under clauses 8.7.4.1 and 8.7.4.2.
Midas disputed the assertion as to sum paid to them by Harmsworth, claiming that only £22,820,932.50 had been paid. Harmsworth refused to pay the difference. Midas then referred the dispute to adjudication (“Sanctus” adjudication).
The adjudicator decided that £1,551,528.00 excluding VAT and interest was payable within seven days. Harmsworth failed to pay.
Midas accepted that it would be required to provide security for Harmsworth’s costs of defending the enforcement of the Sanctus adjudication. Harmsworth countered that Midas was owed nothing, because Midas owed other sums to Harmsworth under another contract, the Print Hall Contract.
Midas then brought an adjudication (“Print Hall” adjudication) seeking to find that no sums were owed by Midas to Harmsworth under a separate contract. The adjudicator decided in favour of Midas.
The stage was set for enforcement of Midas’ Sanctus adjudication and for Harmsworth to seek to defend that on the basis of overturning the Sanctus decision itself, and on the basis of its cross-claim arising out of the Print Hall contract. It was common ground that Midas should provide security for Harmsworth’s costs of those processes; the question was adequacy of that security.
Decision
Harmsworth argued that, as Midas was insolvent, there was inadequate security for the cost of final proceedings that Harmsworth may bring upon enforcement.
Citing Meadowside Building Developments Ltd (In Liquidation) and 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC), Judge Martin Bowdery KC emphasised that the safeguards must seek to place the responding party in a similar position to if the company was solvent. Although the court acknowledged that it is unlikely that this aim can be wholly achieved, his comments support the argument that an insolvent claimant company must provide adequate security.
Adopting the approach in Styles v Wood Limited (in administration) v GE CIF Trustees Limited [2020] EWHC 2694 (TCC), the court reiterated that, in assessing the amount of security required, the court must consider:
- The actual issues to be determined in final proceedings;
- The scope of work already carried out in the adjudication (e.g. gathering of witness evidence);
- The likely recoverable costs rather than the likely incurred costs; and
- In determining the security required, the court will be receptive to an incremental approach.
The court also addressed Harmsworth’s counsel’s claim that Midas were attempting to stage the claims. The court agreed that permitting Midas to advance its claim under the Sanctus claim, whilst deferring Harmsworth’s cross claim under the Print Hall contract, would put Harmsworth in a worse position than if Midas were solvent. Therefore, Midas’ suggestion that security be staged was rejected.
The parties provided contrasting figures for security of costs. Harmsworth’s solicitor estimated £568,616 for the Sanctus claim and £767,105 for the Print Hall claim, whilst Midas’ solicitor estimated £55,000 and £258,000 respectively. The court ruled that both figures were extreme. Taking the factors in Meadowside and Styles v Wood into account, the court ordered security of £150,000 for the Sanctus claim and £400,000 for the Print Hall claim.
For further information, please contact William O’Brien or John O’Mahony.