Merits now relevant in applications to stay adjudication decisions

A recent decision from Northern Ireland has proposed a change in the law concerning stays of execution in relation to adjudication decisions by permitting a limited merits-based review as part of the discretion to grant a stay. The judgment proposes a merits-based review, firstly, as a threshold requirement for the granting of a stay and, secondly, so that any “clear views” of the merits can be weighed generally in the court’s discretion. Decisions are likely to follow from other UK courts as to whether to adopt this revised approach. In the meantime, the decision is likely to prompt more complex adjudication enforcement proceedings, as both Claimants and Defendants seek to take advantage of merits-based arguments in light of this decision.  

Stays of execution against the enforcement of adjudication decisions

Courts adopt a robust approach to the enforcement of adjudication decisions, refusing to do so only in exceptional circumstances. That approach is thought to be consistent with the “pay now, argue later” philosophy underpinning the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”) (and the corresponding Construction Order 1997 in Northern Ireland). However, the courts have a discretionary power to order a stay of execution of an adjudicator’s decision, effectively preventing payment of the awarded sum, if there are concerns that the claimant would be unable to repay the sum if the decision was later overturned.

The key principles governing the exercise of the court’s discretionary power were established in Wimbledon Construction v Vago, with one further principle added in Gosvenor London Ltd v Aygun Aluminium UK Ltd.  These are as follows:

1. Adjudication is designed to be a quick and inexpensive method of arriving at a temporary result in a construction dispute.
    
2. As such, adjudication decisions are intended to be enforced summarily and the successful claimant should generally not be kept out of its money.
    
3. However, if the defendant applies to stay execution, the court must consider whether there are any special circumstances which render it inexpedient to enforce the decision.
    
4. The probable inability of the claimant to repay the award if later overturned may constitute special circumstances.
    
5. If the claimant is insolvent or in liquidation, a stay of execution will usually be granted.
    
6. However, inability to repay the overturned sum will not usually justify a stay if the claimant’s financial position is either (i) the same or similar to that at the time the contract was entered into; or (ii) due, either wholly or significantly, to the defendant’s failure to pay the awarded sum.
    
7. The grant of a stay would also be justified if the evidence demonstrates a real risk that the claimant might organise its financial affairs with the purpose of dissipating or disposing of the awarded sum.

In Trident Maintain Ltd v Falcon Investment Ltd, the court made clear that it would be “exceptionally unusual” for the merits of an adjudication decision to be taken into account when considering an application for a stay. More recently, in Quadro Services Ltd v FP McCann Ltd, the court stated that there was “no authority to support a general proposition that the merits of the underlying claim are a relevant factor when deciding whether or not to grant a stay”.

Kevin Watson Construction Ltd v Radius Homes Ltd          

Kevin Watson Construction Ltd (“KWCL”) applied to enforce a “smash and grab” adjudication decision obtained against Radius under a construction contract for a housing development in Belfast. Radius applied for a stay of execution on the basis that, due to KWCL’s financial position, there was a real risk KWCL would be unable to repay any sum awarded to Radius in a proposed “true value” adjudication (for more on the relationship between “smash and grab” and “true value” adjudications, see our recent Law-Nows here and here).

Among other matters, KWCL sought to rely on what it considered to be the strong merits of its position to oppose a stay. It contended there was no prospect of Radius obtaining a favourable true value adjudication decision and that a stay should be refused on that basis alone.

A threshold requirement

The Northern Irish Hight Court noted the comments made in the Trident and Quadro decisions, but declined to follow them, finding instead that the court “can and should consider merits in any stay application based on impecuniosity.”

The court noted that a failure to consider the merits poses a risk of manifest injustice as, “if the court does not take merits into account a situation could arise where a [claimant] will be denied payment of an award in circumstances where there is no reasonable prospect of a defendant ever obtaining an award against him.” In support of that proposition, the court emphasised the policy objective of the statutory adjudication and payment regime to improve cashflow and ensure that small contractors are not kept out of their money.

A consideration of the merits for this purpose was, in the court’s judgment, to be carried out in a similar way to the merits requirements for an interim injunction, known as the American Cyanamid test. Accordingly, Radius was required to establish a “serious issue to be tried” or a “real possibility” that it would succeed in a true value adjudication. If it could not meet this threshold, the court would refuse a stay and consideration of KWCL’s finances would not be required.

The court did not consider this approach as contrary to the Wimbledon principles, noting that those principles were of a general nature and that Coulson J (as he then was) had expressly qualified them as being “not set in stone”. The fact that a further principle had been added in Gosvenor was evidence that Wimbledon was never intended to be exhaustive.

A “clear view” of the merits

In addition to the threshold requirement noted above, the court also considered it could “give appropriate weight to any clear view it forms from reading the evidence of the relevant strength of the parties’ cases” when deciding whether to exercise its discretionary power. The court again drew parallels with the law in relation to interim injunctions where a similar principle applies permitting a clear view of the merits to weigh in favour of an injunction.

The court stressed, however, that – just as in the injunction cases – it must make any assessment of the merits “without a mini-trial or having before it copious affidavit evidence” and refrain from any attempts to “resolve critical disputed questions or difficult points of law”. It is only if the court is able to form a “clear view” of the merits from the limited evidence before it, that any weight should be given to the merits in exercising its discretion.

In the case before it, Radius had established a real possibility of success, thereby meeting the threshold requirement, but the court had before it only two affidavits, one from each party, and was unable to form any clear view of the merits. The application was therefore dismissed purely by reference to the Wimbledon principles without any further reference to the merits.

Conclusions and implications

This is a significant decision which proposes to change how applications for stays of execution in relation to adjudication decisions are to be decided. Although not binding on English, Welsh, or Scottish courts, the decision is likely to be relied upon by Claimants and Defendants to adjudication enforcement proceedings where the merits of an adjudication decision (or the lack thereof) is thought to favour their position. Claimants, on the one hand, will argue that that the merits are so strongly in their favour that the threshold requirement has not been met. Defendants, on the other hand, will argue that clear flaws in the adjudication decision should be weighed in favour of granting a stay.

The court’s reasoning in requiring a threshold test akin to that which applies on interim injunction applications appears to be directed toward a very specific form of unfairness where the beneficiary of an adjudication decision is kept out of its money by reference to flimsy and unsubstantiated threats that the decision will be challenged. That specific scenario does not appear to have been considered previously. However, the further point that, having passed the threshold test, the court might then form “clear views” of the merits and take those into account when exercising its overall discretion runs directly contrary to the judgments in Quadro and Trident. It therefore remains to be seen whether this judgment (or any part of it) will be followed in other UK courts.

Subject to any disapproval of the decision in other jurisdictions, the scope of all applications for stays in relation to adjudication decisions will be significantly expanded and will need to include evidence and argument as to the underlying merits of the decision.  This will create a greater administrative, time, and cost burden for both the courts and the parties involved. Cases will inevitably arise where one party, desirous of having a “clear view” of the merits in its favour, will rely on quantities of evidence which the other party objects to as inappropriate to the nature of an enforcement hearing.

Some parallels may be drawn to the practice adopted by the English courts in relation to Part 8 proceedings commenced to challenge the merits of an adjudication decision with a view to having that challenge determined at the same time as any enforcement application. The practice is now distilled in paragraph 9.4.5 of the TCC Guide as follows:

“… a practice had grown up of applications to enforce an adjudicator’s decision being met by an application for a declaration that the adjudicator had erred often without proceedings under Part 8 being commenced. This approach was disruptive and not in accordance with the spirit of the TCC’s procedure for the enforcement of adjudicator’s decisions. It is emphasised, therefore, that such cases are limited to those where:

a) there is a short and self-contained issue which arose in the adjudication and which the defendant continues to contest;

b) that issue requires no oral evidence, or any other elaboration beyond that which is capable of being provided during the interlocutory hearing for enforcement; and

c) the issue is one which, on a summary judgment application, it would be unconscionable for the court to ignore; and further that there should in all cases be proper proceedings for declaratory relief.”

Whether similar restrictions would be placed on the type of merits evidence permitted to be raised in support of applications for a stay of execution, assuming the principle of the present decision is accepted by the TCC, remains to be seen. 

References:

American Cyanamid Co (No 1) v Ethicon Ltd [1975] UKHL 1

Wimbledon Construction Co 2000 Ltd v Vago [2005] EWHC 1086 (TCC)

Trident Maintain Ltd v Falcon Investment Ltd [2016] EWHC 3895 (unreported)

Gosvenor London Ltd v Aygun Aluminium UK Ltd [2018] ESCA Civ 2695

Quadro Services Ltd v FP McCann Ltd [2021] EWHC 1490 (TCC) (unreported)

Kevin Watson Construction Ltd v Radius Homes Ltd [2024] NIKB 20