Adjudication and Insolvent Companies – falling at the final hurdle – will the decision be enforced?

Our article in July 2020 commented on the Supreme Court decision in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] USC 25. This case opened the doors to more adjudications being started by liquidators of construction companies. It said that there was unlikely to be either (i) a successful argument of no jurisdiction; and/or (ii) an injunction granted by the court to prevent a company in liquidation commencing adjudication proceedings. However, Bresco did leave open the issue whether a court would enforce an adjudication in any event, which was considered recently by the Technology and Construction Court in John Doyle Construction Limited (in liquidation) v Erith Contractors Limited [2020] EWHC 2451.

The facts

John Doyle was a subcontractor to Erith in relation to some landscape works at the Olympic Park for the 2012 Olympics.  The Claimant, John Doyle, had been in liquidation since 2013.  The dispute related to the final account for those works.The right to make this claim was assigned by the liquidator to a third party, Henderson Jones, in 2016.  The arrangements with Henderson Jones raised various complex legal issues.  John Doyle commenced an adjudication in January 2018 for £4 million. The adjudicator awarded £1.2 million in June 2018.  Erith did not pay and there were discussions between the parties including an offer by John Doyle of security in return for payment. In April 2020, John Doyle sought enforcement of the adjudicator’s decision. The hearing was delayed pending the outcome of the Supreme Court decision in Bresco.

The decision

The judge, Fraser J, relying on Bresco, set out the principles to be applied by the court when considering whether to grant an application for enforcement by way of summary judgment of an adjudication decision in favour of a company in liquidation:

1. Whether the dispute in respect of which the adjudicator has issued a decision relates to the whole of the parties’ financial dealings under the construction contract or only one element of it. Fraser J said that this means, for example, that a “smash and grab” adjudication would rarely, if ever, be enforced.
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.
4. Whether the liquidator is prepared to offer appropriate undertakings such as ring fencing the enforcement proceeds and/or whether there is other security available.
5. Whether there is a real risk that the summary judgment enforcement of an adjudication decision will deprive the paying party of the security for its cross claim.

These five principles relate to tests of whether the defendant has a “real prospect of successfully defending the claim or issue” and whether there is a “compelling reason why the case should be disposed of at trial”.

Based on this Fraser J held that summary judgment would be available to a company in liquidation which seeks to enforce an adjudicator’s decision where:

1. The decision of the adjudicator would have to resolve (or take into account) all the different elements of the overall financial dispute between the parties to the construction contract. Where, as here, the dispute referred was the valuation of the referring party’s final account, summary judgment will potentially be available (dependent upon the other considerations below). If the dispute referred is a more narrowly defined one, such as the valuation of a single component part of an interim payment, or one single head of claim, then it will not.
2. Mutual dealings on other contracts, or other defences, if they have not been taken into account by the adjudicator, will be taken into account by the court on the summary judgment application.
3. There is no “real risk” that summary enforcement of the adjudicator’s decision would deprive the paying party of security for its cross-claim.

It was in John Doyle’s favour that the dispute related to the final account.  The mere existence of a cross claims on another project did not of itself mean that summary judgment should be denied.  However, the real issue in this case was whether there was a real risk that Erith would have no security for its cross claim.  The concerns here are (i) recovery of the money paid to John Doyle and (ii) the costs incurred in getting that money back.

In this case Henderson Jones offered security by way of a letter of credit (but only once monies had been paid in full of the adjudicator’s decision) and an ATE insurance policy.  Fraser J looked in detail at the proposed forms of security and decided that this was insufficient because it would not put Erith in the position that if it successfully overturned the adjudicator’s decision had John Doyle been solvent.  This would have required John Doyle to (i) repay the capital sum and (ii) meet any adverse cost orders.

Fraser J also noted that if he was wrong that John Doyle was not entitled to summary judgment, that he would have granted a stay of execution based on the principles in Wimbledon v  Vago (2005). These principles included that, “if the claimant is in insolvent liquidation…. then a stay of execution will usually be granted.”

Conclusion

Whilst the Supreme Court in Bresco was clear that a company in liquidation had the right to adjudicate, there are clear difficulties if it seeks to enforce any decisions in its favour.  In this case, the key issue was the lack of adequate security available to the paying party.

In addition, there was some comments about whether the streamlined process for enforcement should apply to applications like this which related to historic disputes.  Fraser J said that the normal timescales for a summary judgment application (a few months rather than a few weeks) would be more likely to allow a defendant more time to collate its evidence and prepare.  This would also mean that the fast track process could be preserved for solvent companies who had urgent need for a decision.  There was a clear indication that this may be addressed in changes to the TCC Guide.