The recovery from the Covid-19 pandemic will invariably see an increase in disputes between parties to construction contracts, some of whom may be insolvent. Insolvent companies may wish to make use of adjudication in order to achieve a relatively quick and cost-effective resolution to such disputes. But, once an insolvent company has an adjudication decision in its favour, is it entitled to have that decision enforced?
In Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25, the court upheld an insolvent company’s right to refer a dispute to adjudication. However, the court said that any subsequent decision was “unlikely to be summarily enforceable”.
Shortly after Bresco was decided, judgment was handed down in John Doyle Construction Ltd v Erith Contractors Ltd [2020] EWHC 2451 (TCC). In John Doyle, the court gave five principles to consider when an insolvent company applied for summary judgment to enforce an adjudication decision in its favour. The first three principles considered whether the underlying dispute addressed the whole of the parties’ dealings, both under the construction contract in question and more broadly. Applying the five principles, the judge refused to enforce the decision as John Doyle Construction Ltd (“JDC”) had offered inadequate security to Erith Contractors Ltd (“Erith”).
In John Doyle Construction Ltd v Erith Contractors Ltd [2020] EWCA Civ 1452, JDC appealed the first instance decision on narrow grounds relating to the security offered to Erith. The court rejected every ground of appeal.
However, the court took the opportunity to discuss a wider point which was “lurking in the shadows of this appeal”, namely whether an insolvent company is entitled to enforce an adjudication decision in its favour without regard to the defendant’s cross-claim or set-off.
John Doyle in the Court of Appeal
Referring to Stein v Blake [1996] AC 243, the Court of Appeal (“CA”) said that the starting point in an insolvency set-off situation (that is, where both parties have outstanding claims) is to ascertain the “net balance” due between the parties.
The CA repeated that Bresco was mainly concerned with whether an insolvent company could commence an adjudication. It was not directly concerned with enforcement, although the court in Bresco did say that enforcement in a situation where the claimant was insolvent would be “frequently unavailable”.
However, the CA went further than the court in Bresco by saying that an adjudication decision is provisional and therefore cannot determine the net balance due between the parties. This is true even in a final account dispute where the other party has no significant cross-claims or set-offs.
In summary, the CA held that an insolvent company is not entitled to enforce an adjudication decision without regard to the defendant’s cross-claim or set-off. Only once the net balance is determined can consideration be given to security issues. The CA did however suggest that the net balance due between the parties could be determined by agreement, at the summary judgement hearing (providing that the net balance can be readily-determined on the information available) or by further proceedings such as arbitration or litigation.
As to security, the CA said that any proposal made by the insolvent company should be “clear, evidenced and unequivocal.” The CA questioned whether making a payment into an escrow account or court was of any benefit to either party. The CA said that one alternative was to issue court proceedings for its original, larger claim and make an offer under CPR Part 36 equal to the adjudication decision sum, thus putting the defendant at risk of paying indemnity costs at the outset.
Commentary
The CA’s decision in John Doyle adds a further hurdle for insolvent parties seeking to enforce an adjudication decision. The insolvent party could seek an agreement with the defendant that the adjudication sum is the net balance due. However, this is unlikely. Alternatively, the court could decide this point, although this approach assumes that the matter can be dealt with at a short summary judgment application hearing. Alternatively, the net balance due can be determined by further proceedings although this could defeat the potential time and cost benefits of referring the dispute to adjudication in the first instance. In summary, only in narrow circumstances will an insolvent company be able to enforce an adjudication decision.
While some insolvent parties will see adjudication as toothless without the entitlement to enforce any decision, the court’s comments in Bresco that adjudication that adjudication in itself has utility should be borne in mind.
On a brighter note, Coulson LJ did have some positive words to say about construction adjudication:
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.
At least for solvent parties to construction contracts, adjudication – backed up by the Technology and Construction Court’s efficient enforcement procedure - will continue to play a large part in resolving disputes.
