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Bresc-yo-yo: The courts' treatment of insolvent parties in adjudications continues to yo-yo in John Doyle Construction Limited (In Liquidation) v Erith Contractors Ltd

Following the Supreme Court’s decision in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25 (Bresco), the Court of Appeal in John Doyle Construction Ltd (In Liquidation) (JDC) v Erith Contractors Ltd (Erith) [2021] EWCA Civ 1452 considered the question of enforcement of adjudication decisions in favour of insolvent companies.

Background

Erith engaged JDC to carry out landscaping works at the Olympic Park as part of the preparations for the 2012 Olympic Games. In June 2012, just before completion of the works, JDC went into administration and in 2013 liquidators were appointed.

In 2018, JDC (in liquidation) commenced an adjudication claiming approximately £4million on its final account. Erith claimed that JDC had been overpaid circa £3million. The adjudicator decided in favour of JDC, in the sum of approximately £1.2million and JDC sought to enforce this decision by way of summary judgment (albeit, for various reasons, including arrangements by the liquidators relating to an assignment of the claim, enforcement proceedings were not commenced until 2 years later).

The last few years have seen some significant judgments in the context of adjudication and insolvency. The courts have grappled with questions regarding the incompatibility between adjudication and insolvency set-off.  There have also been discussions about the extent to which adjudication decisions in such circumstances are likely to be enforced if the paying party has a cross claim to potentially set off against the decision. In such circumstances, the paying party is likely to face difficulties recovering sums due if it is successful in its cross claim, as the proceeds of the adjudication award it has paid over are likely to have been distributed to creditors. The courts have heard arguments that adjudication is therefore futile in such circumstances and have looked at the types of undertakings and security that might be required in such circumstances.

Around the time JDC was seeking to enforce the adjudicator’s decision, the Supreme Court was about to hand down its judgment in the Bresco case and the JDC hearing was therefore postponed pending handing down of the Supreme Court’s judgment.

Further details of the Supreme Court decision in Bresco can be found in our article here. In brief, the Supreme Court held that insolvent companies do have a statutory right to commence adjudication. finding that there was no incompatibility between construction adjudication and the operation of the insolvency rules or insolvency set-off. However, the Supreme Court did not consider the question of enforcement of adjudication decisions in detail although it noted that there may be some circumstances in which enforcement may be appropriate and endorsed the approach set out in an earlier case regarding the ring-fencing of proceeds and provision of appropriate security. 

Turning back to JDC v Erith, Justice Fraser on enforcement declined to grant JDC summary judgment to enforce the adjudicator’s decision on the basis that JDC had failed to provide adequate security for Erith’s cross-claims and costs. JDC appealed. 

For further detail on Justice Fraser’s enforcement decision please see our article here.

Decision of the Court of Appeal

The Court of Appeal upheld Justice Fraser's findings on the inadequacy of the security provided by JDC. An insolvent claimant seeking to enforce an adjudicator's decision must ensure its offers of undertakings and security are “clear, evidenced and unequivocal” such that it is “beyond argument what has been offered and why”. Unfortunately for JDC, the Court of Appeal held that this requirement was not satisfied concluding that JDC’s evidence was “unnecessarily extensive” (it relied on numerous witness statements) and that both the security offered and the basis of such security was not clear. 

Is a company in liquidation entitled to enter judgment in these circumstances?

Having dismissed the appeal, the Court of Appeal turned to the issue which was “lurking in the shadows of this appeal” namely the question of “whether a company in liquidation, with an adjudication decision on its final account claim in its favour, but facing a continuing set-off and counterclaim, is entitled to summary judgment at all.” 

The Court of Appeal noted that “In Bresco the Supreme Court said that the Court of Appeal had been wrong to find that a company in liquidation could not commence adjudication proceedings.”

JDC argued that the Supreme Court decision went further and provided that an insolvent party was entitled to summary judgment to enforce an adjudicator’s decision even where there was a cross claim. The Court of Appeal in JDC did not accept this interpretation of the Bresco decision.

The Court of Appeal noted that in Bresco the Supreme Court “was not directly concerned with enforcement”. It was focused on “how and why an insolvent claimant should be entitled to commence adjudication proceedings” and noted that there are many reasons why adjudication may be a useful commercial weapon, irrespective of whether the resulting decision is capable of summary enforcement.

Although the starting point was that summary judgment to enforce an adjudicator’s decision may be unlikely where the claimant is in liquidation, Lord Briggs in Bresco (obiter) had provided examples of circumstances in which enforcement of an adjudicator’s decision in favour of an insolvent party “may not be inappropriate”. These are where:- (1) the cross-claim is undisputed (2) the disputed cross claim is of no substance (3) the cross-claim can be determined by the adjudicator, because the claim and cross-claim form part of the same ‘dispute’ under the contract in which case the adjudicator may be able to determine the net balance.

Lord Justice Coulson, giving the leading judgment in JDC v Erith noted that the third example failed to account for the provisional nature of adjudication. Adjudication “can[not] be treated as if it were a final determination of the net balance, in circumstances where the other party maintains its set-off and cross-claim.” Lord Justice Coulson did not believe “that Lord Briggs was saying in his obiter observations about enforcement that a company in liquidation was entitled to enter judgment  … on the basis of a provisional decision, in circumstances where there was a continuing set-off and cross-claim.”

Due to the existence of Erith’s continuing cross-claim and Lord Justice Coulson’s commentary on the provisional nature of adjudication, it therefore seems that whether or not JDC had adequate security in place, the appeal would nevertheless have failed.

Practical implications

The Court of Appeal’s decision may discourage liquidators from adjudicating claims where there is a continuing set-off and cross-claim and demonstrates the significant difficulties that will be faced by liquidators seeking to enforce adjudicators’ decisions in these cases and the limited circumstances in which enforcement may be appropriate.

For further information, please contact Sarah WasniowskiLois Putnam or Frank Alden.

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