A recent Supreme Court judgement clarified the right of insolvent companies to start adjudications. In the course of this judgement, it was stated that an adjudicator's decision in favour of an insolvent company will not always be enforceable; this was left to the discretion of the court to which the enforcement application is made. This present decision provides clarity as to how the court is likely to exercise its discretion, in laying down five principles that the court must consider in deciding whether to enforce an adjudicator's decision in favour of an insolvent company.
This dispute arose in 2012 in relation to a construction contract for landscaping works at the Olympic Park in Stratford, London. John Doyle Construction (JDC) brought a claim against Erith for £4 million it considered due in relation to its Final Account. Shortly afterwards, JDC entered liquidation. At the subsequent adjudication, the adjudicator awarded JDC approximately £1.2 million. It is this decision which the liquidator of JDC (the claimant) was seeking to enforce.
In the intervening period, there was significant development of the law regarding the rights of companies in liquidation to adjudicate disputes; most importantly, the Supreme Court's decision in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd. Indeed, the decision in this case can be considered a necessary corollary of the Bresco decision. In Bresco, it was held that an insolvent party can adjudicate a dispute. However, Lord Briggs clarified that the adjudicator's decision may not be enforced due to the insolvency. This would be a matter for the court involved in the enforcement proceedings.
As it transpired, Fraser J, who presided over Bresco at first instance, was appointed to decide this case. He set out five principles that the court should consider when deciding whether an adjudicator's decision should be enforced in favour of an insolvent company.
- To be enforceable, the adjudicator's decision should consider all the different elements of the overall financial dispute between the parties. The dispute here concerned the Final Account, so the adjudicator's decision did reflect this principle.
- The court should consider whether there are any dealings between the parties that are outside the realms of the construction contract. By default, these would be outside the jurisdiction of the adjudicator and so may not be reflected in the adjudicator's decision, but will nonetheless be relevant to the court in deciding whether that decision should be enforced.
- Similarly, it was relevant whether the defendant could rely on defences not deployed in the adjudication, which the court could take into account.
- The court should consider whether the liquidator is prepared to offer security to the defender to protect any cross-claims. For example, if the liquidator were to offer to ring-fence the sum in question, the courts will be more likely to enforce the decision of the adjudicator. Such security would mitigate the risk identified in the final principle.
- There should not be a risk that enforcing the decision will deprive the losing party of security for any cross-claim.
It was on these latter two principles that the claimant's case was found lacking. There was no offer made to ring-fence the sums awarded by the adjudicator. The claimant had taken out insurance to cover the expenses of the litigation, but this was judged to be inadequate. Furthermore, the claimant offered as security what it said was a letter of credit, which Fraser J instead deemed to be a letter of intent. In other words, this letter from the bank was not a guarantee of payment, it was a promise to issue a guarantee of payment upon certain contingencies being met. This meant that, at the time of judgement, no security actually existed.
On the basis that the claimant did not provide adequate security to protect the cross-claims of Erith, Fraser J declined to enforce the adjudicator's decision.
Fraser J explicitly acknowledges that it is in the public interest that liquidators should be able to pursue and enforce debts owed to companies in liquidation in a cost-effective manner. This also means that parties engaged in disputes with companies in liquidation should not assume that they are in the clear. Given the predicted rise in insolvencies in the construction sector as a result of the COVID-19 pandemic, this is something to remember.
Liquidators, in particular, should take heed of this judgement, and consider whether they are able to provide the requisite level of security when bringing an action of this type.
This judgement provides necessary clarity to situations in which an adjudicator finds in favour of an insolvent company. This will assist parties in predicting the courts' attitudes to enforcement of such decisions. However, the judgement suggests that this may be limited to final account disputes. Decisions in narrower disputes will likely fall foul of the first principle laid down by this judgement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.