Compatability of insolvency and adjudication – the next chapter

John Doyle Construction Limited (in liquidation) v Erith Contractors Limited [14.09.20]

In one of the most significant decisions dealing with the interplay between insolvency and adjudication since the Supreme Court judgment in Bresco Electrical Services Limited v Michael J Lonsdale (Electrical) Limited [17.06.20] (“Bresco”), the Technology and Construction Court (TCC) considered John Doyle Construction Limited’s (“JDC”) application for summary judgment to enforce an adjudicator’s decision.

Background

We considered the Bresco decision in our article Supreme Court – insolvency and Adjudication are compatible. The takeaway points from that decision were that:

  1. Insolvent parties do have jurisdiction to bring adjudications (and the net balancing process under the Insolvency Rules is separate)
  2. Adjudication by insolvent parties is not futile, and
  3. Enforcement of an adjudicator’s award may not always be appropriate, but should be addressed on the facts at the enforcement stage.

This inevitably means that the TCC will become the battleground for parties to thrash out the issues via enforcement proceedings. Fraser J’s reasoned and helpful judgment in the present case gives an indication as to how such proceedings will be dealt with.

Facts

Erith Contractors Limited (“Erith”) was engaged by BAM Nuttall Limited to carry out certain construction works relating to the 2012 Olympic Games, with JDC to perform a large proportion of those works by way of a contract dated July 2010.

JDC performed a substantial amount of work before appointing administrators on 21 June 2012, and Erith had to step in and complete the works. In 2013 JDC went into liquidation. The liquidators attempted (but failed) to agree with Erith the amount of payment outstanding to JDC on the Final Account. In December 2016, JDC’s liquidators entered into an agreement with a third party seeking to assign JDC’s right of action against Erith in exchange for £6,500 and entitlement to 55% of the proceeds of any claim. Adjudication was commenced in January 2018 and the adjudicator provided his decision in June 2018. JDC had sought £4 million but was awarded £1.2 million.

The court accepted that delay thereafter had been largely caused by developing case law in the area and JDC eventually issued its claim for enforcement of the decision in April 2020.

Principles

Fraser J set out five principles for considering an insolvent party’s application to enforce an adjudicator’s decision:

  1. Whether the adjudicator’s decision deals with a dispute encompassing the whole of the parties’ financial dealings under the construction contract, or simply one element of it. Fraser J noted that a tightly defined or smash and grab style adjudication would rarely, if ever, be suitable for enforcement by a company in liquidation.
  2. Whether there are mutual dealings between parties outside of the construction contract under which the adjudicator has resolved the particular dispute.
  3. Whether there are other defences available to the defendant that were not deployed in the adjudication – Fraser J considered (2) and (3) might be different ways of expressing the same proposition, but mentioned examples of personal injury claims or liability in some other commercial field.
  4. Whether the liquidator is prepared to offer appropriate undertakings, such as ring-fencing the enforcement proceeds, and/or where there is other security available.
  5. Whether there is a real risk that the summary enforcement of an adjudication decision will deprive the paying party of security for its cross-claim – again Fraser J considered that (4) and (5) may also be different ways of expressing the same principle.

Applying these principles, Fraser J denied JDC’s application for summary judgment. The adjudication did not deal with all outstanding matters between the parties and JDC did not offer sufficient security or ring fencing for the judgment amount or Erith’s costs. He stated that, even if he was wrong and summary judgment should have been granted, he would have utilised much of the same reasoning to issue a stay of execution to prevent enforcement.

Finally, Fraser J was also particularly critical of the arrangement in which the right to the claim was transferred to the third party, and also the lengthy delay in progressing the claim itself to its current stage. He suggested that the TCC’s accelerated procedure for enforcement of adjudicator’s decisions was not appropriate in cases involving such delay.

Comment

The effect of the judgment is that, in practice, and as many practitioners suspected, parties in liquidation seeking to enforce an adjudicator’s award are unlikely to be any better off than they were after the first instance decision in Bresco. Whilst, legally, they are entitled to commence adjudication and will not be restrained from doing so, practically, there are very few instances in which the court is likely to allow any award to be enforced. Indeed, Fraser J considered these were likely to be limited to final account disputes where the parties have no other mutual dealings, and can offer sufficient security.

However, the risk that employers and contractors may be required to incur costs engaging with speculative adjudication and enforcement proceedings issued by liquidators (or third parties on their behalves) remains, and it remains to be seen how parties will deal with this from a commercial perspective.

Read others items in Construction and Engineering Brief - November 2020

Related item: Supreme Court - insolvency and adjudication are compatible