Construction – developments in enforcement since Bresco
03 December 2020
In the judgment of Bresco Electrical Services Ltd v. Michael J Lonsdale (Electrical) Ltd, which was handed down in June 2020, the Supreme Court unanimously upheld the right of companies in liquidation to commence adjudication proceedings and provided useful guidance on the principles a court will consider on an application for enforcement of an adjudication award by an insolvent party, including consideration of what will amount to adequate security in the event it is later established that the insolvent party is ordered to pay the other party’s costs. This was a welcome development for insolvency practitioners, as the adjudication process is generally a more efficient, quicker and cheaper alternative to litigation.
Since Bresco, there have been two further decisions in respect of summary judgment applications to enforce an adjudicator’s award in such circumstances. These judgments show that insolvent companies still need to overcome a number of obstacles before they will be successful in enforcing an adjudication award.
Still hurdles to overcome
The case of John Doyle Construction Ltd v. Erith Contractors Ltd [2020] EWHC 2451 (TCC) highlighted that insolvency practitioners will have high hurdles to overcome when seeking to enforce an adjudication award. In this case, Fraser J set out five principles for considering an insolvent party’s application to enforce an adjudicator’s decision:
- Whether the dispute is one in respect of the whole of the parties' financial dealings under the construction contract in question, or simply one element of it.
- Whether there are mutual dealings between the parties that are outside the construction contract under which the adjudicator has resolved the particular dispute.
- Whether there are other defences available to the defendant that were not deployed in the adjudication.
- Whether the liquidator is prepared to offer appropriate undertakings, such as ring-fencing the enforcement proceeds, and/or where there is other security available.
- Whether there is a real risk that the summary enforcement of an adjudication decision will deprive the paying party of security for its cross-claim.
Applying these principles, Fraser J denied John Doyle’s application for summary judgment. As well as the fact that the adjudication did not deal with all outstanding matters between the parties, he also held that the security offered was inadequate and did not provide ‘reasonable assurances’ to the opponent that sums would be available to meet any adverse costs orders.
In brief, the reasons the security was found to be lacking was that there was no offer to ring fence the sums awarded by the adjudicator and that the after-the-event (ATE) insurance policy was inadequate because it was not procured by the liquidators, but rather a third-party the claim had been assigned to, and also contained material exclusions and avoidance provisions. Fraser J was also critical of the arrangement in which the claim was assigned to the third party. Therefore, the court did not grant enforcement and found in Erith’s favour.
Adequate security
Conversely, in Styles & Wood (in administration) v. GECIF Trustees, an adjudicator’s award was enforced in favour of the company in administration. In this case, Myerson Solicitors represented Styles & Wood (S&W) and the adjudication process was started before S&W went into administration. The proceedings continued and S&W was awarded a substantial sum by the adjudicator. However, GECIF refused to comply with the adjudicator’s decision on the grounds of futility. In response, S&W brought enforcement proceedings before the courts.
S&W proposed to fulfil the conditions of enforcement (as set out in Meadowside v. Hill Street [2019] EWHC 2651 (TCC)) by putting in place appropriate security. This was done by the administrator ring-fencing any award sums and taking out an ATE insurance policy (arranged by TheJudge) to cover any adverse costs should an application to enforce the adjudicator’s decision be unsuccessful or should the adjudicator’s decision be successfully appealed.
HHJ Parfitt ultimately accepted the security and decided in favour of S&W. This was on the condition that the ATE insurance policy remained in force and the administrators provided the necessary undertakings to ringfence the sum until the conclusion of any appeal process from the arbitrator’s award.
The two decisions highlight the importance of the adequacy of the security. There was no third-party funder involved in the case of S&W, which arguably made matters more straightforward although the decisions demonstrate that each case will turn on its facts.
It is likely that we will continue to see adjudication being used by insolvency practitioners particularly because unlike with many court proceedings, the process of adjudication has not changed due to Covid-19, and the same time limits and rules apply. Equally, as more companies are predicted to go into insolvency due to the Covid-19 pandemic, in order to avoid the same outcome as in John Doyle, it is essential that consideration is given to the case law position particularly in respect of appropriate security.
Emily Thomas is the Head of Broking for TheJudge Global, one of the longest-established and most well-known and trusted brands in the litigation insurance and litigation funding market.
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