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Posted January 26, 2022 | Published in Dispute resolution

Adjudication “the only game in town” for many construction disputes but are insolvent companies allowed to play?

Introduction

The Court of Appeal judgment in John Doyle Construction Ltd (“JDC”) v Erith Contractors Ltd1 (“Erith”) is the latest case to explore the relationship between adjudication and insolvency. 

The case confirms that, while insolvent companies may commence adjudications following Bresco v Lonsdale2, it will only be in rare cases that decisions in their favour will be summarily enforced.   

In the JDC v Erith  judgment, Coulson LJ echoed the Supreme Court’s praise for the adjudication regime, commenting that adjudication was not “somehow just part of ADR” and that “it is not alternative; for most construction disputes, it is the only game in town”. 

In this Blog post, we look at JDC v Erith in more detail, briefly recap some of the earlier instalments of adjudication versus insolvency, and consider to what extent insolvent companies are allowed to play the “game” of adjudication.

Why are we here?

The reason for the number of reported cases in this area is the basic conflict between the adjudication and insolvency regimes.  Under the Insolvency Rules3, when a company enters liquidation, mandatory set-off applies.  This means that, where the creditor and debtor have mutual dealings, the creditor is entitled to set-off any sums they owe to the debtor against the sum they are owed by the debtor.  Under the adjudication regime, a party with a temporarily binding decision in its favour may obtain payment by summarily enforcing it in the TCC but it may subsequently be overturned by the paying party in court (or arbitration). 

However, if an insolvent party obtains an adjudicator’s decision in its favour and then seeks to enforce it, then a problem potentially arises.  First, the decision may not be for the “net balance” between the parties.  The responding party is faced with paying the decision in full and being left to prove any cross claims it may have in the liquidation and only receive pence in the pound.  Mandatory set-off has not applied.  Secondly, as adjudication decisions are inherently provisional and do not finally resolve all claim and counterclaims because the unsuccessful party can “argue later” in court (or arbitration), they should not be summarily enforced in favour of the insolvent party.   

JDC v Erith 

In the first instance judgment4, Fraser J decided that JDC, the insolvent claimant company seeking to summarily enforce the decision, had failed to provide adequate security to enable the Court to order enforcement.  

Background

In 2010, Erith engaged JDC to carry out hard landscaping works in connection with the Olympic Park ahead of the 2012 London Olympics.  JDC carried out a substantial amount of work and then went in to administration in 2012. 

The liquidators considered that JDC had final account claims against Erith.  In 2016, the liquidators sold JDC’s claims to a firm called Henderson Jones specialising in the purchase of such claims.  In 2018, JDC commenced an adjudication against Erith and was awarded £1.2 million.

The TCC decision

In his judgment, Fraser J considered the circumstances in which an insolvent party is entitled to summary judgment on an adjudicator’s decision in its favour.  The Supreme Court in Bresco had confirmed that an insolvent party was entitled to commence an adjudication.  This overturned the decisions of the TCC and the Court of Appeal, which had followed the longstanding position set out in 2000 in Bouygues5 that an insolvent parties could not commence an adjudication and that an injunction could be sought to prevent its progress.  The Supreme Court in Bresco suggested that it would be a matter of discretion for the Court as to whether a decision in favour of an insolvent party would be enforced but that it would not be appropriate to enforce such a decision where the liquidator has failed to provide sufficient security.

In JDC v Erith, Fraser J considered that there were five principles to be applied when deciding whether an insolvent party was entitled to summary judgment on an adjudication decision.  The first three related to the question of whether the decision decided the whole of the issues in dispute under the construction contract or between the parties more widely.  If there are other counterclaims available to the paying party not decided in the adjudication, then enforcement may not be available as the net balance between the parties would not have been determined.  Fraser J noted that a “smash and grab” decision in favour of an insolvent party would rarely be enforceable because such a decision would not address all of the claims and counterclaims between the parties. 

" …the difficulties they face at the enforcement stage will surely leave them questioning whether they want to or whether the result at the end of the “game” is worth the expense of playing. "

The fourth and fifth principles related to the offering of security by the insolvent party to address the risk that the enforcement would deprive the paying party of its cross claim or ability to overturn the adjudicator’s decision.  The judgment of Mr Adam Constable QC in Meadowside6, which also involved an insolvent company seeking to summarily enforce an adjudicator’s decision, provided some examples of what might amount to adequate security: a third party guarantee or bond, undertakings from the liquidators such as ring-fencing or ATE insurance. 

Fraser J considered that, because the adjudication between JDC and Erith was for JDC’s final account, the first principles were met.  As to the provision of security, JDC had provided a draft letter of credit from Henderson Jones’ bankers (designed to cover the recovery of the sum ordered to be paid by the adjudicator) and an After the Event insurance policy (to deal with Erith’s costs exposure in any subsequent litigation), but no undertakings were provided by the liquidators in relation to ring-fencing or otherwise.

However, Fraser J decided that the security was not good enough.  The letter of credit was no more than a letter of intent: it was still in draft, the application had not been made to the bank and Henderson Jones would only provide it once they had actually received the money. Further, the ATE policy had a number of material exclusions similar to ATE policies that had been held to be insufficient to provide security for costs.7

Summary enforcement of the decision was refused.  Fraser J noted he would have granted a stay of execution in any event.

The Court of Appeal

JDC’s appeal was made on three grounds:

  1. The liquidators had offered adequate security which the Judge had failed to consider.
  2. JDC’s security offered in respect of Erith’s costs was adequate and not limited to the ATE policy.
  3. JDC did not need to provide adequate security for Erith’s costs in any event as result of Insolvency Rule 6.42.

The Court of Appeal heavily criticised JDC for not making its position on the security being offered crystal clear in the TCC.  Coulson LJ confirmed that any undertaking or security being offered by a claimant company in liquidation needs to be clear, evidenced and unequivocal. 

As to the first ground of appeal, JDC argued that they had “offered” that Erith pay the amount identified in the adjudicator’s decision into an escrow account or in to court.  Coulson LJ found that no such offer had been made by JDC to Erith; the monies were to be paid to Henderson Jones (via JDC).  In any event, Coulson LJ found that a payment into court would be the “worst of all worlds” because it would deprive both parties of cash, which is exactly what adjudication was introduced to avoid.

Coulson LJ rejected the second ground of appeal, finding that the Judge had considered all of the security offered and that he was right to have found it to be inadequate.  

The third ground was found to be untenable: rule 6.42 was of no assistance to JDC because it only concerned the prioritisation of expenses incurred by the liquidators in proceedings brought by the liquidators, not Erith’s costs in proceedings against the liquidators.

Is enforcement available to insolvent companies?

Interestingly, Coulson J went further and (obiter) tackled the broader question of whether summary enforcement of an adjudicator’s decision is available to insolvent companies at all.  

The starting point in Bresco was that enforcement would be frequently unavailable to companies in liquidation.  Lord Briggs had given some examples of where it might be appropriate, including where the adjudicator had dealt with any cross claims.  JDC argued that they fell within that exception because the adjudication was on the final account and so the cross claims had been dealt with.  

However, the problem, according to Coulson LJ, was this did not account for the fact that an adjudicator’s decision is always provisional and cannot be a final determination of the net balance.  In this case, Erith maintained its set-off and cross claim, which had yet to be finally determined.  As a result of mandatory insolvency set-off, JDC had no entitlement to enforcement of a sum found provisionally to be due to it. 

JDC argued that, following Bresco, an insolvent claimant should always be entitled to summary judgment as adjudication without enforcement is pointless.  The Court of Appeal said that this would rewrite Bresco, which concerned an insolvent party’s ability to commence an adjudication and found that doing so without the ability to enforce was not futile. 

JDC also argued that they were entitled to summary enforcement because the sum due was the net balance and there were no significant cross claims.  The Court of Appeal disagreed. The provisional finding of an adjudicator, even on a final account dispute, cannot be treated as if it were a final determination of the net balance, where the other party maintains its set off and cross claim.  An insolvent party’s cause of action is for the net balance only.

It is now clear, following JDC v Erith, that while an insolvent company can commence an adjudication, it will face significant hurdles at the enforcement stage.  These include the provision of clear and unequivocal security to protect the paying party against the risk of dissipation of the adjudication award and an adverse costs order in the event that the adjudicator’s decision is overturned.

Even if adequate security is provided (which must be “clear, evidenced and unequivocal”), Coulson LJ’s obiter comments appear to take us back in the direction of Bouygues.  It seems that summary judgment will only be permitted in very rare circumstances. For example, if the parties have agreed that the adjudicator would finally decide the net balance due between them or where a Notice of Dissatisfaction is not served.  However, even then, there is likely to be a stay of execution.   Adjudication may be open to insolvent parties following Bresco in theory, but its attractiveness in practice seems significantly reduced following JDC v Erith.

While insolvent companies might be allowed, following Bresco, to play the “game” of adjudication, the difficulties they face at the enforcement stage will surely leave them questioning whether they want to or whether the result at the end of the “game” is worth the expense of playing. For claims of a similar value, the alternative, litigation, with its inherent greater costs risk and slower timescales, is not particularly attractive either.

  • 1. [2021] EWCA Civ 1452.
  • 2. [2020] UKSC 25
  • 3. Insolvency (England and Wales) Rules 2016
  • 4. [2020] EWHC 2451 (TCC).
  • 5. Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] BLR 522
  • 6. Meadowside Building Developments Ltd v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC)
  • 7. Premier Motorauctions v Price Waterhouse Coopers and Lloyds Bank [2017] EWCA Civ 1872
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