15 December 2020
Under Construction - Q4 2020 – 4 of 5 Insights
The Supreme Court decision in Bresco made it clear that a company in liquidation does have the right to adjudicate its disputes under a construction contract. Any difficulties concerning potential repayment by an insolvent company to the paying party if the paying party later should overturn the adjudicator's decision should be taken into account at the summary judgment hearing to enforce an adjudicator's decision.
Now, with the case of John Doyle v Erith Contractors, we have further guidance as to how the court will approach enforcement.
Where an adjudicator's decision is made in favour of an insolvent party there is a risk is that should the losing party subsequently overturn the adjudicator's decision the liquidators of the insolvent party will be unable to repay the sums or meet any adverse costs order in the resolution of the dispute. In other words, the "pay now" element of adjudication might not be capable of being unwound should the "argue later" element of adjudication result in success for the responding party.
London, 2012: in what now feels like a lifetime ago, the country was preparing to host the Olympic games and developers were being hired to build the beautiful Olympic village.
John Doyle were a landscaping company that in 2010 agreed to partner up with Erith Contractors to do some landscaping work on the village. Erith were already an "approved" supplier on the developer's preferential subcontractor list. The parties submitted a joint tender on the understanding that John Doyle would perform the works with Erith Contractors as a kind of sponsor.
Two years later, John Doyle was in serious financial difficulty. In June 2012, a month before completion, the firm went into administration. John Doyle would not recover and would subsequently go into insolvent liquidation. This left Erith Contractors with the burden of fulfilling the NEC3 contract in time for completion in July 2012.
The parties went into adjudication in January 2018 and John Doyle was awarded damages of £1.2 million, including VAT and interest. Having been awarded this sum, the liquidators for John Doyle applied for summary judgment from the court to enforce the award.
The court asked three questions:
(paraphrased from paragraph  of the judgment)
Paragraph 54 of the judgment sets out the five principles Mr Justice Fraser applied when considering an application for summary judgment of an adjudication decision in favour of a company in liquidation:
This list of considerations was influenced heavily by the dicta of Lord Briggs in the Bresco case, and this judgment is effectively a clarification of the position of the court in Bresco.
Taken together, Mr Justice Fraser considered that summary judgment might be suitable for a party in insolvent liquidation on a final account award in its favour, or where the adjudicator has determined the net balance between the parties, but is less likely to be used for a more narrowly defined dispute, such as the valuation of an interim payment dispute.
However, where there is a risk that the summary enforcement of an adjudication decision will deprive the paying party of security for its cross claim, the court is likely to resist summary judgment unless the insolvent party can show that there will be sufficient funds to meet the paying party's cross-claim (by the offer of suitable security by the liquidators, or ring-fencing of funds) and any adverse costs order.
Mr Justice Fraser didn't find that the circumstances in the case – the second question for the court – allowed for summary judgment.
Although the adjudicator had considered all dealings as one and the claim was for settlement of a final account, the security offered was by a letter of intent from the third party that had allegedly purchased the rights to the proceeds of the litigation and an "After The Event" (ATE) insurance policy. The letter of intent was not equivalent to a professional undertaking from the liquidators or ring-fenced funds. The court was also concerned that an insurance pay-out under the ATE policy was not a certain event given the policy terms. Neither option committed any funds from the party offering them as security.
The court adopted the approach set out in Meadowside that whatever safeguards were offered by the liquidators, they should seek to place the paying party, Erith Contractors, in the same position they would have been in had John Doyle remained solvent. On this logic, the summary judgment was not granted: there was a real risk that should the Erith Contractors subsequently overturn the adjudicator's decision the liquidators would be unable to repay the adjudication sum or meet any adverse costs order.
In determining what is suitable security much will depend on the facts and circumstances. In the recent case of Styles & Wood, the judge accepted that the security offered by the liquidators and enforced the adjudicator's decision in favour of the insolvent claimant. Here, no third-party litigation funder was involved, and the security offered was an undertaking to ring fence funds, and an ATE policy to cover a potential adverse costs order in the subsequent final determination hearing. Helpful guidance from this case suggests that when considering the amount of security for the adjudication award, an undertaking to ring fence funds needs to continue until the conclusion of any appeal process; and that when thinking of the level of security for costs credit should be given for the work carried out in the adjudication itself.
Although summary judgment in John Doyle was not granted, the court confirmed based on the principles set out in Vago that a court would usually order a stay of execution where the claimant is in insolvent liquidation.
This meant that the third question for the court – should the order be stayed – would be expected to be answered 'yes' as a default response, in the absence of appropriate security.
As the court emphasised, it is "clearly in the public interest that liquidators should be able to pursue and enforce debts owed to companies in liquidation in a cost-effective manner". Equally it is important that just because one party to a construction contract is in liquidation, this should not entitle to other party to a windfall.
Adjudication remains a fast way of getting a decision on an issue at relatively low cost and it is likely that adjudication will still be used by insolvent companies as a way to realise assets. Of course, not all adjudications result in enforcement applications - adjudication can often lead to finality of the dispute where the losing party decides not to challenge the award. But, where enforcement is required, the court will be mindful of the need to avoid any potential injustice in the sums not being available to be repaid should the final determination decide the adjudicator's decision was wrong.
The case of Bresco established in principle that summary judgment can be awarded to enforce adjudication where insolvent parties are involved. However, there are still significant hurdles that an insolvent company will need to overcome, and John Doyle v Erith, provided clarity about the approach that the courts will take.
by multiple authors