In Meadowside Building Developments Ltd (in liquidation) v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC) Arthur Graham-Dixon successfully represented the Defendant employer (‘HSMC’) in resisting the Claimant’s (‘Meadowside’) application for summary judgment to enforce an adjudicator’s decision. This was on the unprecedented ground that, since the Claimant’s funding agreement was shown to be champertous, there was a real factual question as to whether there was also an abuse of process, which could not be disposed of summarily because Meadowside had refused to disclose the agreement. This is also the first judgment to consider the exception to the general rule against insolvent parties using adjudication, as laid down in the Court of Appeal’s decision in Bresco v Lonsdale [2019] EWCA Civ 27.
In 2015, Meadowside was placed into voluntary winding up. Under the parties’ JCT Minor Works Building Contract, this required a final account to be taken of the sums due between the parties. Equally, under Rule 4.90 of the Insolvency Rules 1986 (now Rule 14.25) an account had to be taken of all the parties’ claims and cross-claims. Meadowside considered there to be sums owing from HSMC, whereas HSMC considered that, on the contrary, it was a creditor in Meadowside’s insolvency.
By 2017, efforts taken by Meadowside’s liquidators to realise a sum from HSMC had not been successful. The liquidators therefore engaged Pythagoras Capital Limited (‘Pythagoras’) to take over the claim. Whilst Pythagoras’ letter of appointment was before the court, the agreement that must have been in place concerning Pythagoras’ basis of remuneration was not. However, it was known that Pythagoras was providing its services in exchange for an undisclosed percentage of the sum awarded by the adjudicator. The funding agreement was never disclosed, despite numerous requests for disclosure from HSMC. This proved fatal to Meadowside’s summary judgment application.
In 2018, Meadowside referred its claim to adjudication. It was represented by Pythagoras in the adjudication proceedings. HSMC did not participate in the adjudication, principally on grounds that the adjudicator lacked jurisdiction as a result of Meadowside’s insolvency. On 3 April 2018, the adjudicator produced a decision in which a net balance to Meadowside of £32,629.63 was found to be due.
On 31 July 2018, before enforcement proceedings were commenced, the first instance judgment in Bresco v Lonsdale was handed down. Fraser J granted an injunction in that case, restraining Bresco from adjudicating, on the basis that an adjudicator lacked jurisdiction where the referring party was in insolvent liquidation. The reasoning of Fraser J was similar to the reasons given by HSMC in correspondence for its non-participation in the adjudication. However, on 24 January 2019, the Court of Appeal overturned Fraser J’s decision on jurisdiction, whilst the injunction was upheld on grounds that the adjudication in that case would have been futile. Pythagoras, incidentally, also acted on behalf of Bresco’s liquidators.
Following the Court of Appeal’s judgment in Bresco v Lonsdale, arguments proceeded between Pythagoras and HSMC on the effect of the Court of Appeal’s decision. By the time that Meadowside issued enforcement proceedings, Pythagoras was seeking payment of the adjudication award by offering security for HSMC’s claim for repayment of the same amount. In other words, Pythagoras was proposing that if HSMC paid the adjudication award, litigated against Meadowside, and established that the adjudication award was incorrect, then Pythagoras would meet Meadowside’s liability in those subsequent proceedings (limited to the amount of the adjudication award plus costs). The security offered was a guarantee from Pythagoras itself. By the conclusion of the oral submissions, a range of potential options for security had been canvassed, including ringfencing by the liquidators of the adjudication award pending the conclusion of any subsequent litigation, as well as the potential procurement of an ATE insurance policy to cover any adverse costs order in such proceedings.
Meadowside argued that these proposals made it appropriate to grant summary judgment to enforce the adjudication award. It therefore fell to the Court to determine the effect of the Court of Appeal’s decision in Bresco v Lonsdale, in particular what was meant by the “exceptional circumstances” in which an insolvent company may properly adjudicate on a dispute and enforce any award in its favour.
Adam Constable QC (sitting as a High Court judge) held that “the fundamental thrust of Bresco, which then ripples through the wider considerations” is that enforcement, without any security provided for the claim to overturn the enforced decision, would deprive the responding party of the security to which it is properly entitled under Insolvency Rule 14.25 (formerly Rule 4.90) and so would wrongly make final, by default, a temporary decision: para. 53. It was also considered highly significant whether the adjudication decision in question reflects a process in which the net balance is determined between the parties, i.e. the netting off process under the insolvency regime. Hence the judgment indicates that many adjudications brought by insolvent companies will still be futile, irrespective of the question of security: paras. 67 and 79.
Accordingly, it was stated in para. 87 that there is likely to be an exception to the rule in Bresco v Lonsdale where (1) the adjudication determines the final net position and (2) satisfactory security is provided in respect of (i) the adjudication award and (ii) any adverse costs order in both the enforcement proceedings themselves and any subsequent litigation.
Because summary judgment was refused (as discussed below), the adequacy of the security offered in this case was a moot point. However, the Court stated that it would have granted a stay of execution in any event. The security offered by Pythagoras was insufficient to cover either the sum awarded in the adjudication or any adverse costs order in subsequent litigation. Meadowside would in this case have been able to apply to lift the stay, but that would have been conditional on a further undertaking from Pythagoras in respect of the costs of any further application to have the stay lifted.
Summary judgment had been refused, in the first place, for the following reasons:
- Provided that Pythagoras was “providing advocacy services, litigation services or claims management services” within the meaning of s. 58AA of the Courts and Legal Services Act 1990 (‘CLSA 1990’), the Damages-Based Agreement Regulations 2013 applied. If so, pursuant to Regulation 4 and s. 58AA(1)-(2) of the CLSA 1990, were the funding agreement to provide for a payment of over 50% of the sums ultimately recovered by Meadowside, it would be unenforceable. It could clearly be inferred – and was implicitly accepted in Meadowside’s further written submissions – that the funding agreement fell foul of Regulation 4.
- The principal dispute that materialised was whether Pythagoras was providing “claims management services” under s. 58AA of the CLSA 1990, the meaning of which is set out in s. 419A of the Financial Services and Markets Act 2000 (‘FSMA 2000’). Meadowside argued that the purpose of the FSMA 2000 is to enable regulation of claims management services, so that in effect the meaning of “claims management services” in s. 419A of the FSMA 2000 would be restricted to those services which have been regulated under the applicable secondary legislation. The Court preferred HSMC’s submissions: the wording in s. 419A of the FSMA 2000 was simply pulled into s. 58AA of the CLSA. It did not follow from the fact that claims management services were regulated that such regulation operated backwards to define claims management services. It followed that the funding agreement was unenforceable.
- The Court also accepted HSMC’s submission that unenforceability under Regulation 4 meant that the funding agreement was champertous, on grounds that the rule of champerty depends on public policy and the Damages-Based Agreement Regulations operate effectively as a legislative definition of the relevant public policy (drawing on the decision in Factortame (No. 8) [2002] EWCA Civ 93).
- By reference to a range of case law, in particular the Court of Appeal decision in Stocznia Gdanska SA v Latreefers Inc [2001] B.C.C. 174 (which drew on the unreported Court of Appeal decision in Faryab v Smyth), the Court derived the principles that ‘trafficking’ in litigation may amount to an abuse of process and that, in turn, a champertous funding agreement may amount to ‘trafficking’ in litigation.
- Working through the applicable factors for determining whether a funding agreement may amount to an abuse of process, the Court considered that all relevant information was not known by the Court. Critically, the terms of the funding agreement were unknown because of Meadowside’s refusal to disclose it, despite numerous requests.
- HSMC’s submission that the issues relating to champerty bore on the enforceability of the decision was accepted. Where there was not merely champerty, but an abuse of process, a company would not be permitted to bring itself within an exception to the ordinary rule under Bresco v Lonsdale. HSMC had established champerty, which may be an element of abuse of process. Therefore, there was at least a realistic prospect of HSMC establishing an abuse of process.
- There being neither sufficient evidence on the point nor (inevitably) full argument, summary judgment was refused.
The judgment sets a number of new precedents. First, it provides welcome guidance on the test laid down by the Court of Appeal in Bresco v Lonsdale. Second, in the field of adjudication enforcement actions, this case appears to be the first time that a party has successfully raised the question of an abuse of process because of an enforcing party’s funding agreement. Third, this is also the first time that the activities of construction claims consultants have been considered in the context of the Damages-Based Agreement Regulations 2013. The judgment helpfully makes clear that the scope of those Regulations is not limited to funding agreements made in relation to court proceedings but also embraces adjudication proceedings themselves. Claims consultants will clearly need to review any damages-based funding practices and satisfy themselves that their agreements are compliant with the Regulations. The case is also a salutary reminder of the risks parties face in refusing to disclose relevant factual material in a summary procedure.
Arthur Graham-Dixon was instructed by Russell-Cooke Solicitors for the Defendant.
To read the full judgment please click here
14 October 2019
