In the landmark case of Bresco the courts confirmed that a liquidator of an insolvent company has a right to refer a dispute to adjudication at any time (See our previous blog).
The courts have now provided some welcome guidance for liquidators on how an insolvent construction company can enforce a favourable adjudicator’s decision.
The background facts to the case of John Doyle Construction v Erith Contractors are, in many respects, irrelevant. What’s important to note is that JDC is an insolvent sub-contractor who has been awarded the sum of £1.2m in an adjudicator’s decision.
JDC sought to enforce the adjudicator’s decision seeking an order from the court for Erith (the main-contractor) to make payment. Erith, resisted this and so the matter came before the specialist construction court.
In reaching its conclusions, the court helpfully set out five principles which should be considered where an insolvent party (such as JDC) seeks enforcement of an adjudicator’s decision:
1. Does the dispute referred to adjudication relate to the whole of the parties’ financial dealings under a construction contract or only a discrete element of it?
2. Are there any dealings between the parties that are outside of the scope of the construction contract to which the adjudicator’s decision relates?
3. Are there any other defences available to the defendant (i.e. the responding party in the adjudication) which were not deployed and used in the adjudication?
4. What security is the IP prepared to offer?
5. Is there a risk that the summary enforcement of the adjudicator’s decision will deprive the paying party (i.e. the responding party in the adjudication) security for its cross-claim?
Applying these principles, the court found in favour of the Erith and, on this occasion, refused to enforce the adjudicator’s decision. The court decided that the key issue was that JDC had offered inadequate security. . For instance:
- the IPs had not offered to ring-fence the monies of £1.2m that Erith would have to pay;
- there was no letter of credit obtained from a funder (only a letter of intent to apply for credit on the receipt of funds – clearly not one and the same thing); and
- the ATE insurance policy (in respect of Erith’s costs of bringing its cross-claims) contained a number of exclusion terms and so was not considered to be adequate security.
In light of these factors, the court decided that there was a real risk that the enforcement of the adjudicator’s decision would deprive Erith of security for its cross-claims and would not put Erith in the position that it would have been had JDC been solvent.
Why is this case important?
It was underlined in the Bresco case that issues surrounding the enforcement of an adjudicator’s decision should properly be dealt with at the enforcement stage and should not hinder the commencement of an adjudication.
This recent case helpfully goes a step further than Bresco and considers the circumstances in which an adjudicator’s decision in favour of an insolvent party may be enforced and what security may be required.
The five principles provided by the court shine a light on the ‘grey area’ of enforcement that was not fully addressed in the decision in Bresco. It provides useful guidance as to what additional steps an insolvent party will have to take before a favourable adjudicator’s decision will be enforced by the courts.
What does this mean for IPs?
This guidance should enable IPs and their legal advisors to better assess the merits of commencing an adjudication on behalf of an insolvent company and the likelihood of recovering monies which can be distributed to the creditors. It helpfully outlines the type and extent of security that IPs will need to be prepared to offer.
This decision reinforces the fact that adjudication remains a useful tool in the armoury available to IPs – especially where the adjudication deals with all of the outstanding matters between the parties (and not simply discrete smaller disputes) and sufficient security can be offered.
A brief side point; the court criticised the time in which it took for the adjudication and the subsequent enforcement proceedings to be commenced (some eight years following the initial insolvency of JDC!). It is key that IPs do not delay in commencing adjudications and any subsequent enforcement proceedings to collect in the monies awarded by an adjudicator.
Ahead of starting an adjudication, it’s important to get specialist advice from experts who understand every step of the process. The team has developed a fixed fee consultation enabling IPs to investigate ways to recover debts owed to insolvent construction companies. For further information, contact Kate Onions or Laura Taylor.