Judgment was given by the Court of Appeal yesterday (7th October) in John Doyle Construction Limited (In Liquidation) v Erith Contractors Limited. This important case considered the relationship between adjudication and insolvency proceedings in the context of applications to enforce an adjudicator's decision. The underlying contract between JDC and Erith had related to hard landscaping works at the London Olympic park in Stratford.

JDC, as an insolvent company, had applied to the court to enforce an adjudicators decision in their favour. At first instance last autumn, the matter was heard in the TCC by Fraser J who found in favour of Erith and dismissed JDC’s application for summary judgment. This was on the basis that JDC had provided inadequate security for both Erith's cross-claims and the costs of bringing any such claim. JDC appealed on the following grounds:

  1. The ringfencing or security offered by JDC in respect of the sum identified in the decision;
  2. The security offered by JDC in respect of future costs orders in Erith’s favour; and
  3. The proper application of Insolvency Rule 6.42.

All three grounds of appeal were dismissed.

The Appeal Judgment

The appeal raised three fact-specific points arising out of the order of Fraser J, in the context of a much wider and critically important 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 position?

In his judgment, Lord Justice Coulson commented:

“…The grounds are narrow because the judge made detailed findings about the adequacy of the security offered by the appellant (a company in liquidation), and it is seeking to argue, not that those conclusions were wrong, but that there were alternative offers of security which the judge did not address in his judgment.”

JDC sought to rely on of the decision of the Supreme Court in Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale (Electrical) Limited [2020] UKSC 25; [2021] 1 All ER 697 (“Bresco”). In Bresco the Supreme Court had made it clear that a company in liquidation was entitled to commence and pursue an adjudication.

JDC submitted that the Bresco decision went further, to the extent that a company in liquidation was entitled to summary judgment to enforce the decision of an adjudicator, as opposed to simply commence an adjudication, and that that entitlement existed regardless of the absence of a final determination of any paying party's set-off and cross-claims.

JDC's position was deemed to be untenable on the following basis:

  • JDC had sought to rewrite the Supreme Court’s decision in Bresco;
  • The submission that there is an entitlement to summary judgment in these circumstances is contrary to the binding principle in Bouygues UK Ltd v Dahl-Jensen UK Ltd [2000] EWCA Civ 507 ("Bouygues"), which was also expressly affirmed in Bresco; and
  • The provisional finding of an adjudicator, even on a single final account dispute where no other significant non-contractual or other contractual claims arise, can be treated as if it were a final determination of the net balance, in circumstances where the other party maintains its set-off and cross-claim.

Commentary:

Enforcing an adjudication award where the claimant is insolvent poses a significant risk to the other party who may be subsequently successful in a set-off and cross-claim. A significant risk of paying a company in liquidation is that, in the absence of adequate ring-fencing, the sum paid is open to be distributed. That would mean that potentially the sum enforced could be distributed and then any set-off and cross-claim could not be fully paid by the liquidator.

Cognisant of this risk, in his judgment Lord Coulson set out the steps an insolvent claimant would need to take to be able to enforce an award:

“If a claimant wants to summarily enforce the adjudicator’s decision, notwithstanding its own liquidation, it needs to be unequivocal about any offer that it is making to ring-fence that money or otherwise protect it. Where there is a dispute about the sufficiency of the undertakings or security on offer, it must at least be beyond argument what has been offered and why…In the present case, JDC failed to follow this simple course.”

It is worth noting that in the first instance hearing Fraser J had been rather critical of the procedure adopted by the parties. It was not appropriate for the parties to benefit from an accelerated procedure, intended to protect cash flow in construction companies, where the company is insolvent, and the project was carried out years ago. Lord Justice Coulson referred to the case of Bouygues in which, more than 20 years ago, the Court of Appeal had made it clear that such claims could not be subject to summary enforcement at all. However, the decision in Bresco may have somewhat modified that previously staunch position.

So whilst the decision in Bresco may have been thought by some to pave the way for insolvent companies to adjudicate with impunity, it is apparent from recent decisions, including this one, that an insolvent claimant will still have to overcome significant hurdles before it is able to enforce an adjudication award.

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? The answer from the Court of Appeal is a sensible and resounding "No".

Finally, the appeal judgement is notable for its robust obiter comments from Lord Justice Coulson in support of the entire adjudication infrastructure as it has developed in the UK over the last 25 years (and indeed spread to many other jurisdictions since):

"I rather cavil at the suggestion that construction adjudication is somehow ‘just a part of ADR’. In my view, that damns it with faint praise. In reality, it is the only system of compulsory dispute resolution of which I am aware which requires a decision by a specialist professional within 28 days, backed up by a specialist court enforcement scheme which (subject to jurisdiction and natural justice issues only) provides a judgment within weeks thereafter. It is not an alternative to anything; for most construction disputes, it is the only game in town."

...there is considerable procedural flexibility in the conduct of a liquidation. The flexibility should be used to ascertain the net balance (one way or the other). In my judgment, it is only once the net balance has been ascertained, by whatever are the appropriate means, that judgment should be entered.