Adjudication – a useful weapon for liquidators or a blunt sword?
This article considers the issues with the enforcement of an adjudicator’s decision by an insolvent company recently considered by the Court of Appeal in John Doyle Construction Limited (In Liquidation) v Erith Contractors Limited [2021] EWCA Civ 1452.
Introduction
In Bresco v Lonsdale [2020] UKSC 25, the Supreme Court made clear that the liquidators of an insolvent company were entitled to commence and pursue an adjudication. The decision was notable for the Court’s observation that “the overall picture of most adjudication decisions achieving de facto final resolution of the underlying dispute appears clear”[1] and appeared to confirm that adjudication was a useful weapon in a liquidator’s armoury. The Supreme Court also dismissed the argument that adjudication brought on behalf of an insolvent company, in circumstances where the responding party had a cross-claim, was a futile exercise because of the potential issues with enforcement. Lord Briggs noted that any issues could be dealt with at the enforcement stage and that such concerns were not an adequate basis to stop a liquidator commencing adjudication in the first instance.
John Doyle Construction Limited (In Liquidation) v Erith Contractors Limited was one of the first adjudication enforcement cases heard after Bresco: the first instance hearing in John Doyle was adjourned to allow for the Supreme Court’s decision and was eventually heard only two weeks after judgment had been handed down. On appeal, the Court of Appeal was given the opportunity to pick up where Bresco left off and consider how the issues of enforcement at the intersection of adjudication and insolvency law were to be resolved. The Court considered the following question: is a company in liquidation entitled to enter judgment on its claim arising out of an adjudicator’s decision, without regard to the paying party’s set-off and counterclaim?
Background
John Doyle Construction Limited (“JDC”) had been in liquidation since 2013. The dispute between JDC and Erith Contractors Ltd (“Erith”) related to a sub-contract for landscaping works to be undertaken at the Olympic Park in preparation for the London 2012 Olympic Games. JDC ceased work in June 2012 prior to completing the works, and eventually entered into creditors’ voluntary liquidation in June 2013. Erith therefore completed the works themselves.
A dispute arose as to the value of JDC’s final account and JDC commenced adjudication in January 2018. The adjudicator gave a decision determining that Erith was to pay JDC £1.2 million inclusive of interest and VAT. JDC and Erith engaged in some pre-action correspondence, during which potential security was discussed, but ultimately, JDC issued a claim form and applied in April 2020 for summary judgment for the £1.2 million sum. At the hearing of the application on 2 July 2020, Fraser J handed down a lengthy judgment and dismissed JDC’s application on the basis that the security offered by JDC was inadequate.[2]
The appeal in the Court of Appeal related to three narrow fact-specific grounds, turning on whether Fraser J had properly considered all of the offers of security put forward by JDC. However, Coulson LJ recognised that the question of whether a company in JDC’s position should be entitled to summary judgment at all was an important issue, stating further at [2]:
“Whilst I accept that, if the appeal fails on the three stated grounds, whatever I say on the summary judgment issue is obiter, it would, I think, be unhelpful for practitioners in those worlds to duck the point altogether.”
The Enforcement of an Adjudicator’s Decision by an Insolvent Company facing a Cross-Claim
- Entitlement to the net balance only in insolvency proceedings
Counsel for JDC’s first argument was that the sum awarded by the adjudicator was effectively the “net balance” after consideration of all potential claims and cross-claims. It was argued that summary judgment should therefore be granted, subject to JDC providing adequate security.
Coulson LJ began by reviewing authorities which confirmed the position that in insolvency, all claims and cross-claims were extinguished so that a party’s entitlement was to the net balance remaining after an account had taken place. On this basis, the Court of Appeal in Bouygues (UK) Ltd v Dahl-Jensen Ltd [2000] EWCA Civ 507 had refused to grant summary judgment to enforce an adjudication decision because, where a cross-claim was asserted, the automatic consequence of the Insolvency Rules 1986[3] was that a paying party would only be liable for the balance after its cross-claim was set off against the award of the adjudicator.
In Bresco, Lord Briggs suggested that enforcement may be possible if the cross-claim effectively formed part of the same “dispute” referred to adjudication, and the adjudicator could thereby determine the net balance between the parties. However, Coulson LJ took issue with this example, stating at [90]:
“The difficulty is that, on the face of it, Lord Briggs’ third example takes no account of the fact that an adjudicator’s decision is necessarily provisional, and cannot therefore be regarded as the final determination of the net balance. To put the point another way, the third example used by Lord Briggs at [65] would appear to run counter to the reasoning and result in Bouygues, where summary judgment was refused.”
Coulson LJ considered that Bresco did not go so far as to say that an insolvent company was entitled to enter judgment on the basis of a provisional decision, in circumstances where there was a continuing set-off and counterclaim. His Lordship considered that JDC’s argument attempted to rewrite Bresco and ran contrary to Bouygues. Furthermore, the offering of security or an undertaking did not overcome the argument’s weakness because the receiving party’s cause of action was for the net balance only; it was therefore not appropriate for the Court to enter judgment until a final account of all claims and cross-claims had been taken. Finally, Coulson J held that entering judgment and ordering payment into an escrow account or into court pending the final determination of all claims and cross-claims would be of no immediate benefit to anyone.
Lewison LJ echoed Coulson LJ’s reasoning in his Lordship’s own judgment and clearly described the practical difficulties with JDC’s argument at [151]:
“If the liquidator makes a distribution leaving insufficient assets to meet the creditor’s cross-claim, the creditor’s claim will necessarily have to be treated as a separate and independent claim, rather than a reduction or extinguishment of the company’s claim. If, on the other hand, the liquidator is precluded from making a distribution, it is difficult to see what utility summary judgment has. I do not therefore consider that [JDC]’s suggested solution is correct. Even if undertakings are given limited in time, there remains a real risk that that summary judgment will deprive a creditor of his right to security.”
- Is adjudication pointless without summary enforcement?
Counsel for JDC also put forward the argument that an insolvent claimant should, subject to the usual requirements of natural justice and jurisdiction, always be entitled to summary judgment because adjudication was pointless without summary enforcement.
Coulson LJ rejected this argument and stated that summary judgment was not the only weapon available to an insolvent company [101]:
“Having commenced enforcement proceedings, an insolvent company can then get the defendant to ‘put up or shut up’. It can make the same (larger) claim that it made in the adjudication, even if it makes plain that it would accept the adjudicator’s lower figures (thereby putting the defendant at the risk of paying indemnity costs from the outset). It may be possible for the claimant to demonstrate an entitlement to interim payment under CPR Part 25. The fact that the adjudicator has apparently considered the claims and found in the claimant’s favour will put the defendant on the back foot throughout. Robust case management would lead to an efficient resolution of the remaining areas of dispute.”
This reasoning seems to echo the views of Lord Briggs in Bresco who stated that:
“… adjudication has, as was always intended, become a mainstream method of ADR, leading to the speedy, cost effective and final resolution of most of the many disputes that are referred to adjudication. Dispute resolution is therefore an end in its own right, even where summary enforcement may be inappropriate or for some reason unavailable.”[4]
Comment
Despite being strictly obiter dictum, the judgments in Bresco and John Doyle provide valuable guidance on how liquidators of an insolvent company may go about making use of an adjudicator’s decision, whether by enforcement or otherwise. Four key points arise out of the Court of Appeal’s judgment in John Doyle:
Firstly, it is not unusual for a construction dispute to involve a cross-claim by an employer or a sub-contractor. Therefore, the issues of enforcement of adjudication decisions described in John Doyle are ones which will be faced by a significant number of liquidators of companies in the construction sphere.
Secondly, enforcement of any adjudication decision may be resisted on the grounds that the receiving party would not be able to make repayment if the paying party obtained a final determination that reversed the adjudicator’s decision. This point is of particular significance when the receiving party is an insolvent company. Therefore, any insolvent party seeking to enforce an adjudicator’s decision summarily must be clear about how it would ring-fence or otherwise protect those sums (see [31-32]).
Thirdly, the value of the adjudication process is not solely in the possibility of summary enforcement in the TCC. A liquidator who refers a dispute to adjudication may be better off relying on the adjudicator’s decision as part of the arithmetic of calculating the balance of all claims and cross-claims, or deploying it as a negotiation tool, rather than simply bringing a claim and seeking summary judgment.
Finally, the adjudication process cannot override the mandatory regime of the Insolvency Rules. In the case of incompatibility between the two, the rights under the insolvency regime will prevail.
Despite the guidance of Coulson LJ at [101], it is not clear whether liquidators will now consider adjudication to be a worthwhile option. The Courts in Bresco and John Doyle touted adjudication as a quick and cost-effective dispute resolution process, but adjudications are often drawn out beyond the basic statutory 28-day period. Indeed, in John Doyle, the adjudication took five months. In those circumstances, and given the issues with enforcement, a liquidator may consider it better to proceed straight to obtaining a final determination of the dispute, whether by bringing their own claim or by waiting to see if their determinations of creditors’ proofs of debt are challenged under the Insolvency Act 1986.
More broadly, it remains to be seen whether practitioners will agree with the Supreme Court and Court of Appeal that an adjudication decision which cannot be enforced under the TCC’s summary procedure is a valuable weapon, not just a blunt sword.
Written by Sahana Jayakumar.
[1] Bresco v Lonsdale at [15].
[2] JDC’s liquidators had also purported to assign their claim to a third party but this fact is not relevant to the matters discussed in this article.
[3] Now set out in Rule 14.25 Insolvency Rules 2016.
[4] Bresco at para. 60.
