Adjudication for insolvent parties | A higher bar than first thought?

Written on 6 Oct 2020

In the wake of the Supreme Court's ruling that an insolvent company can adjudicate, the TCC have confirmed that there remain high hurdles to the insolvent party enforcing any adjudication decision.

A few months ago, we wrote about the landmark Supreme Court judgement in Bresco v Lonsdale, which opened the door to insolvent parties referring disputes to adjudication. That door has been partially closed again, in a judgment that sets out further guidance as to when a liquidator may be able to enforce an adjudication decision.

A big factor in the Supreme Court reaching its decision in Bresco was that the adjudication in question dealt with essentially all of the issues of the wider dispute between the parties. Rather than being incompatible with the insolvency regime and "an exercise in futility", the adjudication was instead deemed to be an effective tool in assisting the liquidator to assess the final account for the net balance between the parties.

In our commentary, we questioned the applicability of adjudicators' newfound jurisdiction to all adjudications involving insolvent parties; particularly those which concern disputes on narrow issues of contractual interpretation, or 'smash and grab' adjudications, as these are unlikely to provide resolution with regards to the final net position.

The recent TCC judgement of John Doyle Construction v Erith Contractors addressed these very same issues. Coincidentally, the hearing was originally scheduled for the same day as the Bresco judgement was due to be handed down, but was postponed so that the court could take account of, and follow, the Supreme Court’s decision in that case.

As a result, John Doyle v Erith effectively builds upon the judgement in Bresco, setting out the criteria for hearing insolvent companies' applications to enforce adjudicator's decisions. In so doing, it emphasises that narrowly defined adjudications, such as the smash and grab, will not be enforced.

Inadequate security

The judge in this case refused to enforce, by way of summary judgment, an adjudication decision in favour of an insolvent party (JDC). The judge decided that there was a real risk that enforcing the adjudicator's decision would deprive the other party (Erith) of security for a cross-claim that it had against JDC. That 'cross-claim' was the final determination of the dispute that had been referred to adjudication.

In coming to this conclusion, the court relied on the inadequacy of the security that had been offered by JDC (a letter of intent and ATE insurance cover) and cited the lack of (a) an offer to ringfence the sums awarded by the adjudicator in a special account or (b) adequate undertakings from the liquidators.

The judge set down five factors that a court will consider when deciding whether to enforce an adjudicator’s award in favour of an insolvent party. These can be seen as an expansion of the Bresco judgement and a qualification of the right of insolvent parties to refer disputes to adjudication:

  1. Whether the dispute in question covers the whole of the parties’ financial dealings under the construction contract in question, or simply one element of it.
  1. Whether there are mutual dealings between the parties that are outside the construction contract under which the adjudicator has resolved the particular dispute.
  1. Whether there are other defences available to the defendant that were not deployed in the adjudication.
  1. Whether the liquidator is prepared to offer appropriate undertakings, such as ringfencing the enforcement proceeds, or whether there is other security available.
  1. 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.

Expanding upon the first point, the judge noted that the courts have experience of parties referring very small, tightly defined disputes to adjudication whilst leaving out other disputes under the construction contract. This may present tactical benefits in some circumstances. If the referring party is in liquidation though, it will not assist that party on enforcement. The judge considered that "'smash and grab' adjudications would rarely if ever… be susceptible to enforcement by way of summary judgment by a company in liquidation".

The court acknowledged that it is unusual for all the different elements of the overall financial dispute between the parties to be referred to the adjudicator. The existence of some cross-claims, which might be of relatively insignificant value, does not of itself mean that a claimant ought to be denied summary judgment. The primary concern is whether there is a real risk that summary enforcement of the adjudicator’s decision would deprive the paying party of security for its cross-claim. In this case, that meant recovery of the sum ordered by the adjudicator, if final determination of the dispute went in its favour.

Comment

There are a number of interesting things that come out of this judgment. First, it is clear that the Supreme Court decision in Bresco does not mean that it is open season for liquidators when it comes to enforcing adjudicator's awards in the courts. The case highlights that while the right to bring an adjudication will not be impinged upon by the courts, there are still many hurdles to get over when it comes to enforcing any decision in its favour.

Second, the judge considered that a "cross-claim" would include a claim by the responding party for final resolution of the dispute by court proceedings or arbitration. In making this point, he emphasised that adjudicator's decisions are only de facto final resolution, or "an intervening provisional stage". This seems significant and potentially far-reaching. In this case it did not matter that the adjudication was one relating to the final account and even that it took account of disputes on other projects between the parties – previously distinctions had been drawn between narrowly defined disputes and ones which resolved all the different elements of the overall dispute between the parties. It was enough that Erith may wish to challenge the adjudicator's decision at a later stage and therefore adequate security would be needed in respect of that. This is even despite the fact that the original decision was reached in early 2018.

Third, the decision sets out clear guidance as to what would or would not be considered adequate security in respect of the defendant's cross claims. The judgment deals with this in respect of both security for the principal sum disputed and also security for costs.

Finally, the judge went on to consider when a stay of execution should be granted, notwithstanding it had already been decided that enforcement was not available to JDC. He held that even if summary judgment were to be granted, a stay of execution would have been ordered. There would need to be "exceptional circumstances" for this not to be the case in respect of any enforcement in favour of a company in insolvent liquidation.

With insolvencies in the construction industry set to rise over the coming months, this decision will be a blow for insolvent companies seeking to recoup claimed sums and increase dividends to creditors. For those on the receiving end of adjudications by insolvent parties, however, this decision will give welcome comfort. Responding parties, for example, will be able to hold off paying out on adjudications brought by an insolvent party, save where it provides adequate security in case a court finds against it on final determination.