In June of this year (2020), the UK Supreme Court issued its judgment in the Bresco Electrical Services Limited (in Liquidation) v Michael J Lonsdale (Electrical) Limited case in which the Court concluded that Insolvent companies enjoy the right to pursue adjudications, even against respondents that have a counter-claim or cross-claim.
Many commentators saw this judgment as opening the floodgates to adjudications by Insolvent companies, but a more recent Court judgment, as set out below, demonstrate that there are, or may be, certain obstacles in the way of Insolvent companies successfully enforcing Adjudicator’s Decisions in their favour.
The judgment (dated 14 September 2020) in the John Doyle Construction Ltd (in liquidation) v Erith Contractors Ltd case ( EWHC 2451 (TCC)) concerned a summary judgment application for the enforcement of an Adjudicator’s Decision, in the case where John Doyle Construction Ltd (in liquidation) (“JDC”) was the Insolvent company.
John Doyle Construction Ltd went into administration on 21 June 2012, and liquidators were appointed in 2013. In December 2016, the liquidators entered into a Deed of Assignment with a company called Henderson Jones and through that Deed of Assignment, Henderson Jones had conduct and control of any proceedings pursued in relation to the assigned claims, and would benefit financially from any assigned claim monies that were recovered.
An Adjudication was subsequently commenced (on behalf of JDC) for a claim of circa £4 Million, and the Adjudicator Decided in June 2018 that £1.2 Million was due to JDC. Despite this, it was not until April 2020 that a Court claim form was issued on behalf of JDC seeking to enforce the Adjudicator’s Decision from June 2018. Erith Contractors Ltd (“Erith”) resisted the enforcement.
In the subsequent enforcement proceedings in the Technology and Construction Court, Mr Justice Fraser (“Fraser J”) found in favour of Erith and declined to enforce the Adjudicator's decision. He decided, amongst other things, that in that particular case, JDC had provided inadequate security for Erith's cross-claims, as well as inadequate security for Erith's costs of bringing such a claim.
In reaching his decision Fraser J made some interesting points which are of wider application to the construction industry in the aftermath of the Bresco Supreme Court case referred to above.
Fraser J noted that Lord Briggs, in the said Bresco case, had accepted that, even though an Insolvent company may have the right to pursue adjudications, even against respondents that have a counter-claim or cross-claim, where a liquidator seeks to enforce an Adjudicator’s Decision, there may be difficulties in enforcement, and Lord Briggs also recognised that the court at enforcement stage may have good reasons not to enforce the Adjudicator’s Decision, or may enforce it but at the same time grant a stay of the judgment sum.
Against this background, Fraser J set out five principles, as follows, that he considered should be taken into account when hearing an application to enforce an Adjudicator's Decision in favour of an Insolvent company.
● Has the Adjudicator considered the entire financial dealings between the parties under the construction contract in question? If not, then it is likely that the Adjudicator’s Decision will not be enforced. Fraser J considered that highly technical, limited, restricted and/or “smash and grab” adjudications would rarely, if ever, be susceptible to enforcement by way of summary judgment by a company in liquidation.
● Are there any mutual dealings between the parties that are outside the realms of the construction contract in question? If so, then it is likely that the Adjudicator’s Decision will not be enforced. These mutual dealings may relate, for example, to liabilities under some other contract between the parties, or may relate to liability arising from personal injury claims.
● Are there any defences that were not deployed in the adjudication? If so, then it is likely that the Adjudicator’s Decision will not be enforced.
● Is the liquidator prepared to offer appropriate undertakings such as ring-fencing the sum in question, or providing other satisfactory security? If not, then it is likely that the Adjudicator’s Decision will not be enforced. Fraser J noted that, in accordance with the judgment in Premier Motorauctions v Price Waterhouse Coopers and Lloyds Bank ( EWCA civ 1872), exclusions in an ATE policy can lead to a significant risk of the policy being avoided, which has led to the courts declining to accept such policies as security in the absence of an anti-avoidance clause.
● Finally, is there a risk that enforcing the Adjudicator’s Decision will deprive the losing party of security for its crossclaim? If so, then it is likely that the Adjudicator’s Decision will not be enforced.
Fraser J suggested that, taken together, the effect of the above principles will be that the type of Adjudicator's Decision in favour of an Insolvent party that may be suitable for enforcement would therefore be limited to those Decisions where all of the different elements of the overall financial dispute were referred to the Adjudicator. As Fraser J noted, such adjudications are unusual and are fairly rare.
Also of general interest, Fraser J said that as was made clear in the Meadowside Buildings Development Ltd (in liquidation) v 12-18 Hill Street Management Co Ltd ( EWHC 2651 (TCC)) case, any funding arrangement which falls foul of the Damages Based Agreement Regulations 2013 (DBAR) may render the enforcement proceedings an abuse of process. In obiter comments, Fraser J considered that in the case in question, JDC's funding arrangement may have been unenforceable not only for a contravention of regulation 4 DBAR, which requires the funded party to receive at least 50% of the damages, but also of regulation 3c DBAR which requires the funding agreement to set out the reasons why the level of damages has been decided upon.
Finally, Fraser J was critical of the procedure adopted in the JDC case. He noted that the TCC has introduced an accelerated process for enforcing Adjudicator's Decisions, and that this was intended to protect cash flow for construction companies. However, in his view, it was not appropriate for claimants to benefit from this accelerated process where the project itself was carried out many years ago, and where the claimant is either an Insolvent company, its liquidator, or a funder. He suggested that at some point, a rewrite of the TCC Guide may need to be made to include restrictions on using the "adjudication business" provisions to enforce decisions relating to historic projects / disputes.
Styles & Wood (in administration) v GE CIF Trustees.
The judgment (dated 4 September 2020) in the Styles & Wood (in administration) v GE CIF Trustees case ( EWHC 2694 (TCC)) was a situation where summary judgment was given (without a stay) for the enforcement of an Adjudicator’s Decision in the case where Styles & Wood (in administration) was the Insolvent company.
The key distinguishing features in the Styles & Wood case from the JDC case referred to above were that, in the Styles & Wood case, the Adjudication had been commenced by the Administrator (not by a funder as in the JDC case) and also that before payment arising from the Adjudicator’s Decision was actually paid over, the sums paid over needed to be clearly ring fenced by the Administrator for potential repayment at a later date, and also that an ATE policy in the form set out in the judgment needed to remain in place at a level of £200,000.00 (or such other level as may subsequently be directed following an application by one of the parties).
Therefore, it can be seen that although there may be ‘obstacles’ in the way of Insolvent companies enforcing an Adjudicator’s Decision, in certain circumstances those ‘obstacles’ can be overcome.
Peter Barnes, Director, Blue Sky ADR Ltd
Date 14 October 2020
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