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24 September 2020

An uphill battle? Adjudication enforcement by an insolvent company

Following the recent Supreme Court decision in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd, it is clear that companies in liquidation have the right to adjudicate a dispute. However, a successful adjudication is only half the battle: the insolvent company must still persuade the court to enforce the decision.

In John Doyle Construction Ltd v Erith Contractors Ltd [2020] EWHC 2451 (TCC), the Technology and Construction Court (TCC) has recently given further guidance on the circumstances in which enforcement may be possible. In short, it still appears that enforcement will be an uphill battle for liquidators.

Background

This case concerned a final account dispute. The claimant, John Doyle Construction Ltd (JDC), was employed to carry out landscaping work at the Olympic Park by Erith Contractors Limited (Erith). The works were completed prior to the 2012 Games, under an amended NEC3 contract. JDC entered administration in June 2012 and then creditors’ voluntary liquidation in June 2013.

The dispute was not adjudicated until June 2018, five years later. JDC’s liquidators had been unable to agree the final account with Erith. The liquidators then purported to assign the debt to Henderson Jones, a company which specialises in purchasing claims from insolvent companies. Eventually the liquidators and Henderson Jones sought to enforce the adjudicator’s decision using the expedited summary judgment procedure in the TCC.

Principles to be applied by the court

The judge (Fraser J) set out the following principles to be applied by the court when considering an application for summary judgment of an adjudicator’s decision in favour of a company in liquidation:

1. Whether the dispute in respect of which the adjudicator has issued a decision is one in respect of the whole of the parties' financial dealings under the construction contract in question, or simply one element of it.

This principle is necessary because parties will often refer a small or tightly defined dispute for adjudication for tactical reasons. Adjudication decisions on narrow issues, such as ‘smash and grab’ disputes, will rarely be susceptible to enforcement on a summary basis by companies in liquidation.

2. Whether there are mutual dealings between the parties that are outside 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.

Principles (2) and (3) are similar. The defendant may be entitled to set off claims that were not decided in the adjudication. The usual principle that counterclaims cannot be set off against adjudicators’ decisions does not apply to insolvency set off. This is likely to present a significant difficulty for liquidators in some enforcement cases, particularly where there are mutual dealings under other contracts (which the adjudicator would not have jurisdiction to consider).

However, the mere presence of cross-claims, which might be of relatively insignificant value, will not necessarily defeat a claim for summary judgment. In the present case, this meant that a cross-claim by Erith for £40,000 on another contract would not by itself prevent enforcement as, even if this claim was entirely valid, it would still leave a significant balance due to JDC under the adjudicator’s decision.

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.

Principles (4) and (5) are also similar. In Meadowside Buildings Development Ltd (in liquidation) v 12-18 Hill Street Management Co Ltd [2019] EWHC 2651 (TCC), the court considered three main ways in which security might be provided by a liquidator: undertakings by the liquidator, a third party providing a guarantee or bond, and After The Event (ATE) insurance.

Here, there was a real risk that Erith would be deprived of its right to have recourse to JDC’s claim as security for Erith’s cross-claim. JDC relied upon a draft letter of credit from Henderson Jones’ bankers and an ATE insurance policy.

However, the court found that an intention to apply for a letter of credit in the future did not provide a sufficient safeguard to Erith. Similarly, the ATE insurance was also considered inadequate due to the terms of the policy (such as restrictions which might allow the insurer to avoid cover). For this reason alone, summary judgment was refused.

Fraser J noted that:

  • As the security was offered through Henderson Jones, if that security had been deemed adequate it may then have been necessary to consider whether JDC’s funding arrangements were potentially unenforceable as an abuse of process, contrary to the Damages Based Agreement Regulations 2013 and/or champertous.
  • Even if summary judgment had been granted, the court would have granted a stay of enforcement. This is the “usual outcome” where the claimant is insolvent and there is insufficient security.

In any event, Erith would not be ordered to pay the sum found due by the adjudicator.

Going forward

A number of interesting points were made by the TCC in this case:

  • It is in the public interest that liquidators should be able to pursue and enforce debts owed to companies in liquidation in a cost-effective manner. A party to a construction contract should not be entitled to a windfall simply because the other party is in liquidation.
  • The Supreme Court in Bresco has made it clear that a company in liquidation has the right to adjudicate its disputes under a construction contract.
  • An adjudicator’s decision may sometimes have utility for a liquidator without the need for enforcement; for example, a decision about which party has repudiated a contract might influence the liquidator’s approach to valuing claims. However, this is likely to be relatively rare. A disputed decision on repudiation may provide limited assistance in resolving the mutual balance due between the parties.
  • Where enforcement is required, companies in liquidation will face “undoubted difficulties”.
  • Summary judgment may be possible if adequate undertakings (or some other suitable security) are available from the liquidator.
  • The streamlined procedure developed by the TCC for enforcement of adjudication decisions is not suitable for summary judgment applications such as this case, where the proceedings relate to historic claims brought by companies in liquidation. The exercise is likely to be more involved and require more time for investigation than is the case for conventional adjudication enforcement claims. Changes to the TCC Guide can therefore be expected. In the meantime, claimants who are in a similar position to JDC cannot expect their claims to be routinely expedited in the same way as conventional adjudication business in the TCC.

This article was written by Andrew Keeley, please contact him at andrew.keeley@crsblaw.com or +44 (0) 1483 252581 for more information, or your usual Charles Russell Speechlys contact. 

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