The Court of Appeal has issued helpful guidance on the circumstances in which an insolvent company may enforce an adjudicator’s decision.
Housing Grants, Construction and Regeneration Act 1996 provides that, subject to a handful of exceptions, any party to any construction contract in the United Kingdom has a statutory right to refer any dispute to adjudication. This process requires a neutral evaluator – the adjudicator – to produce a decision within as little as 28 days. The decision of the adjudicator is binding on both parties on a provisional basis – it is binding unless either one of them refers the matter to arbitration or court proceedings. The system has been well supported by the courts.
However, the provisional authority of the adjudicator’s decision has occasionally been difficult to harmonise with other areas of law. In particular, there has long been some uncertainty as to whether an adjudicator’s decision should be enforced when the successful party is insolvent – the Insolvency Rules may reduce the insolvent party’s entitlement to reflect cross claims and the insolvent party may not be in a position to repay an incorrect adjudicator’s decision. In those circumstances, is it appropriate to enforce the adjudicator’s decision? And if an adjudicator’s decision has no prospect of ever being enforced (because of those issues), is it sensible for an adjudication to be allowed to commence in the first place?
Bresco Electrical Services Ltd v. Michael J Lonsdale (Electrical) Ltd
The Supreme Court’s decision in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd (in June 2020) answered some of these questions. This case made it clear that companies in liquidation have an unfettered right to commence adjudications under their construction contracts, notwithstanding their insolvency status. However, that was not the end of the matter. The Supreme Court further ruled that it should be left for the court at enforcement stage to determine whether to enforce an adjudicator’s decision, in light of the circumstances and the company’s insolvency status.
In other words: an insolvent company may adjudicate a dispute and it may get an adjudicator’s decision, but it may not necessarily be entitled to enforce the adjudicator’s decision.
John Doyle Construction Ltd (In Liquidation) v. Erith Contractors Ltd
That left some uncertainty about the rules which would apply at enforcement stage. This issue has now been considered by the Court of Appeal in John Doyle Construction Ltd (In Liquidation) v Erith Contractors Ltd, following an appeal from the first instance decision handed down by the Technology and Construction Court.
In John Doyle, the sub-contractor was engaged by the contractor to carry out certain works on the London Olympic Park prior to 2012 – the sub-contractor subsequently went into administration shortly before completion of the works, and a dispute regarding the value of the final account ensued. In adjudication in 2018, the sub-contractor was awarded £1.2 million, which the contractor refused to pay, citing the sub-contractor’s insolvency. The sub-contractor commenced court proceedings to enforce the adjudicator’s award and sought summary judgment. The sub-contractor offered security for repayment of £1.2 million (together with costs), in case a future court order awarded a repayment of this sum, but the Technology and Construction Court refused summary judgment, ruling that the sub-contractor’s security was inadequate.
On appeal, the Court of Appeal upheld the TCC’s ruling and declined to enforce the adjudicator’s decision, agreeing that the sub-contractor had offered insufficient security to guarantee repayment of the adjudicator’s award. The Court of Appeal stressed that the burden is on a claimant to show that the security is sufficient: it remarked that “any undertakings or security being offered by a claimant company in liquidation need to be clear, evidenced and unequivocal”. On the facts, the sub-contractor had failed to meet this test.
That was enough for the Court to reach its decision, but the Court of Appeal added some further commentary which raises some doubts about whether an insolvent company can ever successfully enforce an adjudicator’s decision. The Court commented that the Insolvency Rules require a determination of the “net balance” (ie the final account) between the parties, which may not always be possible to deduce from a provisional decision which only looks at one side of the equation. The Court of Appeal did not consider that 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”.
Reflecting on the Court’s decision
This case is the latest instalment of an ongoing debate as to whether the Insolvency Rules have primacy over the adjudication provisions in the Housing Grants, Construction and Regeneration Act 1996, or vice versa. At times, this debate has appeared quite intellectual, but if the result of this case is that there are no practical circumstances in which an insolvent company can enforce an adjudicator’s decision, it will significantly change the balance of power between construction clients and their contractors in commercial disputes.
That probably still remains to be seen, particularly as the Court’s analysis of this issue was not needed to decide the appeal, but this is an area of law worth watching for anyone involved in a construction dispute.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, November 2021