FTH Limited v Varis Developments Limited  EWHC 1385
The (very) recent judgment of FTH Limited v Varis Developments Limited is a further example of the courts approach to enforcing adjudication decisions where the enforcing party is subject to a form of insolvency event (here, a Company Voluntary Arrangement (“CVA”). This, as those familiar with construction law will know, follows from the important judgment of Bresco v Lonsdale handed down by the Supreme Court in 2020.
In this case, the Claimant had obtained two adjudication decisions; one upholding the validity of a pay less notice and one concluding that the Defendant’s termination of the parties’ contract was invalid and that they had in fact repudiated the contract (the “Decisions”). However, after obtaining the Decisions, the Claimant entered into a CVA which was designed to last for 12 months (with the power to be extended), and aimed to produce dividends of 56p for every £1 for un-secured creditors. At this stage, the Defendant made clear it would resist any attempt to enforce the Decisions, primarily based on a cross claim it had for circa £1.7 million.
The Claimant subsequently applied to the court for enforcement of the Decisions (by way of summary judgment), which the Defendant predictably resisted.
The court refused to enforce the Decisions. The starting point was the case of Bouygues (UK) Ltd v Dahl-Jensen, which held that, when a company in insolvent liquidation has obtained an adjudication in its favour, the decision will not generally be enforced due to the risk that the other side would be exposed if it were not able to recover costs/ cross claims if they were successfully made out. However, it was acknowledged that a CVA differs in form from a party in insolvent liquidation.
The case of Bresco explained that the purpose of a CVA is to enable a company “to trade its way out of financial trouble”, and in such circumstances adjudication could be a quick and cheap method of improving cash flow and permitting the CVA to work. However, Bresco also highlighted that this is very much fact dependant and no definitive guidance was provided on the approach to be taken in cases involving CVAs and the enforcement of adjudication decisions.
Ultimately the court decided that there remained a “real risk” that the Defendant may be deprived of adequate (or any) security in respect of its cross claim if it enforced the Decisions. A number of facts led to this conclusion, namely that, unlike in Bresco, this particular CVA was not designated to allow the Claimant “to trade its way out of trouble” as even if the CVA was to fulfil all financial expectations, it would still only permit recovery of 56p in every £1. Additionally, the court was not persuaded that the Claimant had recently been trading profitably and appeared to have limited faith in the intended outcome of the CVA.
The court’s decision once again raises questions around the “utility argument” used in Bresco, namely if a court is reluctant to enforce an adjudication decision when a party is experiencing an insolvency event, is there any point that party obtaining the adjudication decision in the first place (noting that here the party entered the CVA after obtaining the Decisions)? Given the authority of Bresco and the weight that was afforded to the facts in this particular case, we would argue that in some cases it would still be a worthwhile exercise pursuing adjudication.
We have also seen decisions enforced over the last 18 months where adequate security to cover the risks highlighted here have been addressed, so all hope is not lost when pursuing and enforcing adjudication decisions when an insolvency event has arisen.
This case report was written by Oliver Macrae and Orlaith Mallen.