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Earlier this year we reported on the Supreme Court decision in Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale (Electrical) Ltd which confirmed that companies in liquidation are able to refer claims to an adjudicator (please see our previous article here).
In the case of John Doyle Construction Limited (JDC) v Erith Contractors Limited (Erith). JDC was in liquidation when it commenced an adjudication against Erith. It was successful with its claim, and then sought to enforce the adjudicator’s decision in its favour. However, on enforcement, the Court decided that whilst JDC had been entitled to commence the adjudication, when considering enforcement there were a number of factors relating to its insolvency which needed to be considered (as set out below).
John Doyle Construction Limited (JDC) (a sub-contractor) carried out landscaping works in connection with the Olympic Park in 2012, on behalf of Erith (a contractor engaged by the management contractor – BAM Nuttall Ltd. (BAM)). JDC went into administration in June 2012 and liquidators were appointed in 2013.
JDC (in liquidation) commenced an adjudication for c. £4million in 2018, which was stayed (postponed) to allow the judgment in Bresco v Lonsdale to be determined. JDC was awarded c. £1.2million by the adjudicator and sought to enforce this decision by way of summary judgment. Erith resisted the enforcement application.
Upon enforcement, Justice Fraser found in favour of Erith and JDC was not granted summary judgment to enforce the adjudication decision.
Principles to be Considered in Enforcement
In reaching his decision, Justice Fraser considered the cases of Bresco v Lonsdale and Bouygues (UK) Limited v Dahl Jensen (UK) Limited . He used these cases to distil the following principles, which are to be considered when deciding whether to enforce an adjudication decision in favour of an insolvent party:
- “Whether the dispute in respect of which the adjudicator has issued a decision is one in respect of the whole of the parties’ financial dealings under the construction contract in question, or simply one element of it.
- Whether there are mutual dealings between the parties that are outside the construction contract under which the adjudicator has resolved the particular dispute.
- Whether there are other defences available to the defendant that were not deployed in the adjudication.
- Whether the liquidator is prepared to offer appropriate undertakings, such as ring-fencing the enforcement proceeds, and/or where there is other security available.
- Whether there is a real risk that the summary enforcement of an adjudication decision will deprive the paying party of security for its cross-claim.”
To expand a little on the above:
- Principle 1 applies where the parties have strategically referred a small, defined dispute to adjudication (excluding other disputes existing between the parties under the contract). If this is the case, it will not help the insolvent referring party to enforce any decision. Justice Fraser specifically referred to ‘smash and grab’ adjudications here, noting that decisions relating to such adjudications “would rarely if ever… …be susceptible to enforcement by way of summary judgment by a company in liquidation”.
- Principles 2 and 3 mean that when considering whether to enforce a decision by summary judgment, the Court will take into account dealings with the same counterparty on other contracts and grounds for non-payment of the sum claimed which may be available to the Responding Party, even if they were not raised or considered in the adjudication from which the decision stems. However, the existence of another claim will not in itself defeat an application for summary judgment. Its ability to do this will depend upon its size and nature.
- Principles 4 and 5 relate to the ability of the paying party to successfully bring a cross-claim. It concerns the availability of the enforcing party’s funds in relation to any such claims. If the amount to be paid upon enforcement will be dissipated by the liquidators to creditors there is often unlikely to be any funds to meet a subsequent cross-claim. If there is a ‘real risk’ that enforcement would deprive the paying party of security for its cross-claim then the decision will not be enforced.
This means that to enforce a decision, the insolvent company may need to provide security for the funds it obtains as a result of summary judgment and any funds necessary to meet a cross-claim (or ‘ring-fence’ the funds it receives and postpone dissemination). This is discussed further below.
The adequacy of forms of security
JDC sought to rely on two separate forms of security to meet a subsequent claim by Erith; a letter of credit from a bank and an After the Event (“ATE”) insurance policy. Justice Fraser considered that, in this case, the security offered was inadequate.
Justice Fraser considered that the credit letter was in fact just a draft letter of intent (rather than an actual letter of credit), offered by a third party and not the liquidators.
In respect of the ATE policy, Justice Fraser determined that it would only have covered an adverse costs order in favour of Erith. In addition, he considered that the ATE policy was insufficient because it contained avoidance and exclusion clauses which could have resulted in a refusal by the insurers to pay out.
The sum paid under enforcement is the most important element to be safeguarded (so that it can be repaid if necessary), with security for costs being a secondary consideration. To enforce an adjudicator’s decision an insolvent company will need to give reasonable assurances that, should the paying party later overturn the adjudicator’s decision, the insolvent company will be able to repay the capital sum and meet an adverse costs order. It may be possible to do this if security is offered by the liquidators or as an actual letter of credit (depending upon the terms), but the specifics of what is sufficient will depend upon the facts of the case.
Effect of the judgment
The judgment does not affect an insolvent company’s right to commence an adjudication. However, unless that adjudication decision deals with all claims and cross-claims between the parties, and unless the insolvent company can offer security for the sums it is to be paid under the enforcement and any funds needed for potential cross-claim costs orders, an insolvent company will find it difficult to obtain a summary judgment enforcing the adjudicator’s decision. That said, provided insolvency practitioners can adequately meet the requirements outlined in this case, it does provide a potential fast track and far less expensive route for companies in liquidation to pursue claims by way of liquidation which might otherwise might not have been pursued due to lack of funds.