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05 November 2020

Adjudicating Construction Disputes and Enforcement – Practical Tips for Insolvency Practitioners

This summer’s landmark Supreme Court decision in Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (in Liquidation) [2020] UKSC 25 (“Bresco”) would have doubtless been interesting news for Insolvency Practitioners (“IPs”) engaged in the construction sector.

Adjudication has long been heralded as a useful form of dispute resolution enabling parties to construction contracts to resolve disputes quickly and cost effectively, whilst preserving the cash flow position of companies across the supply chain. The decision of the Adjudicator is binding upon the parties, until finally determined by Court proceedings or arbitration. However, it is very rare to see parties litigate or arbitrate the same dispute which has previously been decided by an Adjudicator, because more often than not, the parties would simply be rehearsing the same arguments and evidence before a judge or arbitrator that were put to the Adjudicator, and the likelihood of obtaining a different decision may not be worth the time or money or risk.

From an IP’s perspective, the benefits ought to be similar, in providing an effective way for them to resolve disputes without recourse to more expensive forms of alternative dispute resolution like arbitration, or via the Courts.

However, whilst adjudication often provides a binding decision on the parties, it requires a judgment from the Court in order to enforce the decision against the losing party (should they refuse to pay). These enforcement cases proceed through an expedited process and there are very limited grounds on which a losing party can challenge the enforcement proceedings.

One of those limited grounds was that the successful party in the adjudication was in an insolvency procedure. The argument being that because the successful party was insolvent there would be little or no chance it would be able to repay the sums ordered to be paid to it in the Adjudication, if and when the matter was finally disputed through arbitration or litigation and the decision of the Adjudicator was overturned (although, as noted above, this outcome is rare). In Bresco, the Supreme Court decided that the fact that a successful party in an Adjudication is currently subject to a formal insolvency procedure will no longer be an automatic bar to enforcement of an Adjudicator’s decision. 

However, the practical ability of an insolvent entity to enforce an adjudication award was a key issue left broadly unaddressed in Bresco. The Supreme Court’s view was that adjudication is a tool that can (and should) be used in its own right and that enforcement should be dealt with on a case-by-case basis. Enforcement of an adjudicator’s decision can often be half the battle and so as far as IPs were concerned, they were not much further forward in their ability to enforce a decision than they had been pre-Bresco. 

Unsurprisingly, there have been two cases already post-Bresco in which the High Court has considered the enforcement of an adjudicator’s award by an insolvent company: John Doyle Construction v Erith Contractors Ltd [2020] EWHC 2451 (TCC) (“John Doyle”), in which case the Court refused to enforce an adjudication award, and Styles & Wood (in administration) v GE CIF Trustees [Unreported] (“S&W”) in which case the court did enforce an adjudication award. To read about those cases, please see the relevant articles from our Construction colleagues Andrew Keeley and Michael O’Connor, here and here

So what does this all mean for IPs? Should IPs seek to adjudicate construction disputes? If the insolvent entity succeeds, will the award be enforced? 

1. Ensure, insofar as possible, that all disputes under the relevant construction contract are referred to adjudication so that any decision/award covers the entirety of the parties dealings under that contract:

Although adjudications can be centred on very narrow or highly technical points within the relevant construction contract (and, as between solvent construction companies, these are often referred to adjudication for tactical reasons), Mr Justice Fraser in John Doyle considered that enforcement of these types of decisions would not assist a company in liquidation and would rarely (if ever) be susceptible to enforcement by way of summary judgment. It is inferred that the Court is far more likely to enforce an adjudicator’s decision in circumstances where the adjudicator’s decision resolves the entirety of the parties’ financial dispute under the relevant contract. This makes complete sense both financially and practically for IPs, in order to resolve an insolvent company’s disputes under a construction contract.

It is worth bearing in mind that each party has to bear their own costs of an adjudication, with the Adjudicator having the discretion to determine how their fees are to be paid by which party and in what proportion. The general position is that the losing party will pay the costs of the adjudicator, although the liability for those costs is joint and several between the parties. However, it would not be surprising if an adjudicator ordered their fees to be paid by the solvent party in the first instance (regardless of the outcome and which party ultimately bore responsibility for payment of the fees), given the chances of recovering their fees from the solvent party are stronger than from one which is insolvent. As far as IPs are concerned, the costs of the adjudication (both their own costs and potentially the adjudicator’s fees) are a cost that will have to be factored into the planning process. 

2. Consider whether there are mutual dealings between the parties that are outside the construction contract:

An adjudicator will not have jurisdiction to consider any cross claims or other disputes that the parties may have against each other which are separate from the relevant construction contract. However, it was held in John Doyle that the Courts will take other disputes into account if enforcement proceedings are brought by an insolvent company. In practical terms, this should always be considered by IPs when they are planning to refer a dispute to adjudication, as if there are separate disputes between the parties, these may well operate to reduce the adjudicator’s award at the enforcement stage if unfavourable to the insolvent company. It remains to be seen to what extent (and how far) the Courts will probe separate unresolved disputes, and whether it is practical for them to assess each dispute separately on their merits before arriving at an overall financial award that it is willing to enforce. However, IPs should approach the planning stage of an adjudication with their eyes open to this possibility, as well as the potential economic impact on the insolvent estate.

It should also be noted that, to the extent these separate disputes have been resolved, submitted and proved in the insolvent estate, insolvency set-off will apply automatically. This could lead to further delay (and potentially, an additional dispute) if, after losing an adjudication, the counterparty submits a proof of debt in respect of a claim only to then demand that this amount is set off at the enforcement stage. IPs will either have to admit the proof (in full or in part) thereby accepting the consequences on insolvency set-off, or to the extent that they reject it, the proof could then potentially be subject to the appeal process at further expense to the estate if the rejection of the proof of debt is disputed.

What is clear for IPs is the need for comprehensive investigations into the mutual dealings between the parties to satisfy themselves that they are not only ensuring the totality of the dispute is (insofar as possible) comprised within the adjudication, but that there are also no additional disputes that may impact any potential adjudication award.

3. Be prepared to offer appropriate security for any cross claims the other party may have:

The principle of enforcing an adjudicator’s award in favour of an insolvent company would be undermined in circumstances where there is a “real risk” that such an action would deprive the paying party of security for its cross claim or their appeal against the adjudicator’s decision. In Meadowside Building Developments Limited (in liquidation) v 12-18 Hill Street Management Co Ltd [2019] EWHC 2651 (TCC), three (non-exhaustive) mechanisms of security to be granted by an IP were considered, being: (1) undertakings by (in that case) the liquidators (e.g. to ring fence the enforcement proceeds within the insolvent estate); (2) a third party guarantee or bond; and/or (3) After The Event (“ATE”) Insurance. Other options may be available, so long as they do not “deprive the paying party” albeit they will not have been expressly approved by the Court.

The discrepancy here is that insolvent companies appear to be expected to offer total security to their counterparty, including not only the adjudicator’s award (should it be overturned) but also the other party’s costs of an arbitration or legal proceedings seeking final determination of the matters disputed in the Adjudication. In S&W, the administrator had offered to ring fence an amount in the administration by way of security for the adjudicator’s award, however the main dispute centred on the adequate level of security for costs in the event the counterparty was successful in overturning the adjudicator’s decision in arbitration or legal proceedings.

IPs therefore need to be aware that, in the event it is likely that enforcement will be required in order to enforce an adjudicator’s award, they may not only have to ring fence an amount in the estate, but they are also likely to have to incur the expense of taking out an ATE policy or having a suitable bond prepared.

4. Beware of the adequacy (or otherwise) of any ATE Insurance:

Both John Doyle and S&W involved consideration of ATE Insurance and its inadequacy in covering the other party’s costs claim in full. However, whilst the Court did not enforce in John Doyle on this basis, they did allow enforcement in S&W. Although it was noted that the ATE Insurance probably wouldn’t have covered the entirety of the defendant’s likely costs claim, the Court held that the amount offered would cover the likely amount that would be recovered.  The Court also held that the costs the defendant said it would incur in bringing legal proceedings (£800,000 - £1,000,000) were disproportionate. It is worth remembering that many of the issues and arguments in any subsequent arbitration / legal proceedings are likely to be repeated from the Adjudication and as such much of the costs will already have been incurred.

Aside from the financial liability of these products, if large sums are involved, be sure to check whether ATE insurance would cover the costs of the claims and/or appeal in full. In addition, IPs need to be aware of any restrictions which might allow an insurer to avoid cover.

5. Be wary that the enforcement proceedings where the successful party is insolvent may take longer than normal:

When IPs refer disputes to adjudication, it is not unusual for the claims in dispute to have been made some years ago. At the enforcement stage (should this be necessary), the Court in John Doyle have stressed that their aim is to give due and proper consideration to these disputes, as they are likely to be more involved than conventional adjudication enforcement claims. IPs should therefore be cognisant of the fact that enforcement of a successful adjudication award may not be routinely expedited as would normally be expected. Whether or not the efficiency of adjudicating disputes under a construction contract is lost for insolvent parties in these circumstances remains to be seen, and each case should be planned and assessed on a case-by-case basis.

In a sector that already contributes a high number of formal insolvencies to the annual totals, 31 December 2020 (being the date on which the temporary restrictions on the presentation of winding up petitions for COVID-19 related debts are lifted) is likely to be a watershed moment for construction companies across the supply chain. However, for insolvent companies to adjudicate (and then subsequently enforce) construction disputes, there do appear to be greater requirements imposed by the Courts for an insolvent company compared to solvent counterparties. IPs need to be aware of these expectations in order to approach adjudication with their eyes open and to assess the benefits versus the risks prior to referring a dispute.

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