20 December 2021
Under Construction - Q4 2021 – 2 of 4 Insights
In John Doyle Construction v Erith Contractors, the Court of Appeal has further considered the interrelation of insolvency and adjudication, providing guidance on the circumstances in which an adjudication award might be enforceable by a company in liquidation.
The judgment does not depart from the Supreme Court decision in Bresco which confirmed that an adjudicator would have jurisdiction to decide a dispute by a company in liquidation, although the ability to enforce an adjudication decision does not automatically follow from the presence of jurisdiction.
The introduction of statutory adjudication in the 1990s revolutionised the resolution of construction disputes. As stated in paragraph 29 "for most construction disputes, [adjudication] is the only game in town." Given the escalating costs of litigation and the risk of adverse costs, many claimants would hesitate before commencing court proceedings for a mid-value claim. The speed and (comparatively) low cost of adjudication means that construction companies have much greater access to justice than before adjudication was introduced in statute. It is clear that adjudication is just as important for companies in liquidation as those which remain solvent; to remove this weapon from a liquidator's arsenal would serve to disadvantage an insolvent company's creditors.
A key element of the judgment is the emphasis that any claim the insolvent Claimant may have is for the net balance due between the parties. On entry into liquidation, entitlement to payment in respect of any individual claim is replaced by an entitlement to the net balance. While that does not lessen the fact that each claim which forms part of the net balance must be determined, the Court was keen to emphasise that a claim forming part of the net balance cannot be enforced in a vacuum.
The Court indicated in paragraph 93 that, for any crossclaims or setoffs to be disregarded for the purposes of calculating the net balance, such crossclaim or setoff must have been finally determined. The parties might agree that an adjudicator's decision will be finally determinative, but without this agreement, it is temporarily binding and therefore may not be sufficient to support the contention that the Court should not deduct the claimed setoff when enforcing the adjudication decision.
The Court of Appeal very clearly underlined that, for there to be any hope of obtaining enforcement of an adjudication award obtained by a company in liquidation, adequate safeguards must be in place. When commenting on the possibility of a liquidator undertaking to ring-fence the enforced award from distribution the Court stated at paragraph 44:
''That undertaking would address head-on the most obvious risk in paying money to a company in liquidation: that you pay the money out to the liquidator; he or she distributes it; but then, if your set-off and cross-claim is subsequently successful, the liquidator can only repay you at 2p in the pound because there are no meaningful assets.''
This is the Court's key concern. An enforcing party in liquidation must be able to provide evidence that the other party would be able to recover the enforced award in full should it commence and win Court Proceedings finally determining the issue in dispute. Concerning security, the Court highlighted in paragraph 32 that "any undertakings or security being offered by a claimant company in liquidation need to be clear, evidenced and unequivocal"
Interestingly, in paragraph 58, the judgment indicated that the Court considered that payment into Court or an escrow account was unfavourable and should be a last resort as " It is contrary to the underlying philosophy of construction adjudication because, instead of maintaining construction industry cash flow, it would deprive Erith – a working contractor – of cash, whilst leaving the money sitting uselessly in the court's account. It would not be available for distribution by the liquidators of JDC, so it is difficult to see how it is of any benefit to them." The Court did not entirely rule out the possibility that payment into court or an escrow account may be appropriate in some circumstances but indicated that other options should be fully explored before suggesting payment into Court or an escrow account.
While much of the judgment, and comments on the enforceability of an adjudication decision by a company in liquidation, were obiter, the judgment provides helpful guidance on the Court's likely approach to enforcement. But, the landscape remains uncertain and is likely to develop over a number of years with more companies in liquidation seeking to enforce adjudication awards.
by Emma Coates