Going for broke - The Court of Appeal decides the limits on insolvent party enforcement of adjudication awards

A version of this article appeared in the Practical Law Construction blog dated 7 October 2021.

The Court of Appeal has handed down judgment in John Doyle v Erith Contractors [2021] EWCA (Civ) 1452, one of the first cases following the Supreme Court decision in Bresco v Lonsdale to test the courts’ willingness to allow insolvent parties to enforce adjudicators’ decisions. The Court of Appeal has affirmed that an insolvent company will not be entitled to enforcement of an adjudication award by way of summary judgment where there is a potential set-off by way of cross-claim which has not been finally determined. Further, adjudication of those claims and cross-claims will not amount to a final determination such as to allow enforcement. DLA Piper acted for the successful respondent at first instance¹ (which we wrote about here) and on appeal.

The background

In Bresco v Lonsdale², the Supreme Court ruled that insolvent parties could refer a dispute to adjudication, obtain a decision, and seek to enforce it against a counterparty (albeit recognising that hurdles remained for insolvent parties at the enforcement stage). This decision, handed down in June 2020, marked a different approach to the TCC and Court of Appeal (both of which had found that adjudication should not be available to insolvent parties, and that adjudication proceedings could be injuncted on this basis). The Supreme Court judgment was handed down at a time in which the pandemic threatened to inflict a wave of insolvencies in the construction industry, and was widely seen as putting adjudication as a weapon back into the arsenal of insolvent parties or liquidators with construction claims, as well as the burgeoning industry of funders purchasing or managing those claims.

Against that background, the dispute between John Doyle and Erith was heard in the first instance by Mr Justice Fraser in the TCC just weeks after the Supreme Court Bresco decision. John Doyle and Erith had been in dispute regarding the final account payment on a sub-contract relating to works on the Olympic Park prior to the London 2012 Olympics. John Doyle had become insolvent before the end of the project, leaving Erith as sub-contractor to step in and finish the works. John Doyle claimed approximately GBP 4 million as owing on the final account; Erith claimed that John Doyle had already been overpaid approximately GBP 3 million. After a 5 month adjudication, the adjudicator awarded approximately GBP 970,000 plus interest and applicable VAT to John Doyle. A further feature of the case was that John Doyle’s claim had been sold to Henderson & Jones, a litigation funder, who was substantially involved in both the adjudication and enforcement proceedings – including in relation to procuring security arrangements.

Fraser J’s first instance judgment emphasised that, at the enforcement stage, barriers remain to enforcement of an adjudicator’s decision by insolvent parties and the court will consider a number of factors in deciding whether to allow enforcement. Those matters include whether the adjudication has dealt with all outstanding matters between the parties (whether under the same construction contract or not), and whether appropriate security is put forward to ensure the paying party can recover the sums paid, and their legal costs, in the event of a subsequent challenge to the adjudicator’s decision. On the facts, Fraser J held that the security offered by John Doyle was inadequate, and declined summary enforcement of the adjudicator’s decision on that basis.

The appeal

On appeal, The Court of Appeal had little difficulty in upholding Fraser J’s findings on the inadequacy of the security provided by John Doyle. John Doyle’s case was that, although Fraser J had rejected the primary security offered (chiefly an ATE Policy which was found to be insufficient on the basis of the exceptions within it), the judge had failed to consider “secondary” and “tertiary” offers of security which, on John Doyle’s case, had been offered as alternatives in the course of oral argument or referenced in witness evidence.

In no uncertain terms, Coulson LJ found that the burden on an insolvent claimant seeking to enforce an adjudicator’s decision was such that “any undertakings or security being offered by a claimant company in liquidation need to be clear, evidenced and unequivocal”. That test had not been met in respect of the alleged further grounds of security relied on by John Doyle, and the appeal failed on that basis. Coulson LJ’s further comments in respect of the particular items of security referred to in the course of John Doyle’s submissions will provide interesting and useful guidance to claimants compiling their own suite of security arrangements, and are a salutary warning to insolvent claimants to have these arrangements firmly in place and on the record – well in advance of their appearance in court.

Adjudicating while insolvent

The judgment is of wider interest however because of the extended obiter discussion by the Court of Appeal as to whether, had adequate security been provided, an insolvent company in the place of John Doyle would be entitled to enter judgment enforcing the adjudicator’s decision at all. This discussion, by Coulson LJ and in a concurring judgment by Lewison LJ, goes to the heart of the tension between adjudication and the Insolvency Rules, and provides a necessary update to the position following Bresco, which left many of the more complex aspects of this interaction to be dealt with by courts at the enforcement stage.

The Court of Appeal’s starting point was that under the Insolvency Rules and the House of Lords authority in Stein v Blake, a claim by or against an insolvent estate is only for the “net balance” of sums owed between the parties. If there are claims and cross-claims between the parties, insolvency set off will apply so that the only remaining rights are to the balance.

The Court of Appeal went further however, and found that as an adjudication is necessarily provisional, an adjudicator’s decision could not finally determine the net balance between the parties even where all relevant claims and cross-claims had been considered in the course of the adjudication. In a dispute such as between John Doyle and Erith, where both parties claimed they were owed money in relation to the final account, Erith had an on-going set off against the amount claimed by John Doyle because it was open to Erith to challenge the adjudicator’s decision in final proceedings and assert its own full claims. In this sense, John Doyle’s claim against Erith was a part of Erith’s security for its own claim against the insolvent John Doyle, which security is protected by the Insolvency Rules regarding set off.

This finding carries substantial implications. While, following Bresco, insolvent parties have the right to adjudicate and obtain a decision on their claims, they will not be able to enforce that decision by summary judgment unless it is possible to show at a summary judgment application that the ‘net balance’ between the parties can be determined. This may be possible where there is no disputed cross claim, or where the disputed cross-claim can be decided or dismissed summarily, but where the final position between the parties remains subject to substantive further proceedings, an insolvent party will have difficulty obtaining judgment on the adjudicator’s decision. Indeed the right to adjudicate will be a white elephant for many insolvent claimants who are contractually obliged to adjudicate and yet will be unable to recover anything unless they pursue further, final litigation or arbitration proceedings subsequent to the adjudication.

The decision will likely provoke a reassessment by liquidators and funders of the benefits of adjudicating certain claims. It may be that contested final account claims such as the one between John Doyle and Erith, or other disputes involving substantial cross-claims, become uneconomical for that portion of the funding industry which has established itself around the opportunities for quick recovery arising from the summary enforcement of adjudication awards. It remains to be seen whether liquidators will continue to see adjudication as a useful tool in the administration of insolvent estates notwithstanding that further litigation or arbitration may be required (and that liquidators may be required to ring-fence sums which are paid out on summary enforcement, rather than making them available for distribution). Given the additional potential barriers and costs of enforcement, the old approach of liquidators adjudicating claims as a matter of course in the hope of a quick recovery (often without a thorough investigation of the merits of the claims beforehand) seems likely to change.

Alternatively, the courts’ approach to enforcement of adjudication awards by insolvent parties may prompt parties to agree to waive the requirements of adjudication and proceed directly to final determination by a tribunal or court. From the perspective of liquidators and funders, such final proceedings are safer territory from which to commence enforcement action, and from the perspective of a respondent, waiving the adjudication phase may make sense in order to save the potentially irrecoverable costs associated with defending an adjudication claim in circumstances where further proceedings are likely in any event.

In any case, the Court of Appeal decision has highlighted the conflict between adjudication, as a provisional decision designed to keep cashflow moving with a “pay now, argue later” ethos, and the Insolvency Rules, which are designed to finally settle an insolvent company’s accounts, and where the capacity to “argue later” can be very limited. The effect of the Court of Appeal’s decision is that where those principles are in direct conflict at the enforcement stage, the Insolvency Rules will win the day.

¹ John Doyle Construction Ltd v Erith Contractors Ltd (Rev 1) [2020] EWHC 2451 (TCC)
² [2020] UKSC 25; [2021] 1 All ER 697