Adjudication enforcement: limited scope and a heavy burden for insolvent parties

We have previously commented on the Supreme Court's decision in Bresco v Lonsdale in which it was confirmed that an insolvent party could refer a dispute to adjudication. However, in the first instance decision in John Doyle Construction v Erith Contractors, the Technology and Construction Court (TCC) confirmed there was a high bar for an insolvent party to meet to be able to enforce an adjudication decision in such circumstances.

The Court of Appeal has upheld that decision and emphasised that there is limited scope for enforcement of adjudication decisions by insolvent parties and that, even where there is such scope, there is a high threshold for insolvent parties to meet to be able to obtain enforcement.

The appeal was primarily concerned with the adequacy of the security offered by the insolvent party to the defendant in relation to ringfencing of the judgment sum until the determination of the defendant's cross-claims and set-off claims, and for the defendant's costs of pursuing such claims. However, the decision is of wider interest to the construction, insolvency and funding industries as the Court of Appeal considered whether a company in liquidation, with an adjudication decision on its final account claim in its favour, but facing a continuing set off and counterclaim, could ever be entitled to summary judgment.

What is required to enforce an adjudication decision?

The decision contains a useful guide as to what is required to enforce an adjudication decision. The Court of Appeal made clear that:

• the application should be simple; and 
• it should be supported by a short witness statement, which should address any particular argument that it is clear will be taken by the defendant.

A claimant company in liquidation has additional hurdles when seeking to summarily enforce an adjudication decision:

• it should take all necessary steps to ensure the hearing is as efficient as possible and that it is clear what issues the judge is being asked to decide; and 
• any undertakings or security being offered by a claimant in liquidation need to be clear, evidenced and unequivocal. Where there is dispute as to the sufficiency of the undertakings or security on offer, it must be beyond argument what has been offered and why.

What is adequate security?

In light of the above, the Court of Appeal gave short shrift to the insolvent company's grounds of appeal, refusing them in their entirety, and providing some useful guidance on what may or may not be adequate security in such circumstances:

• Payment into court or escrow account would be contrary to the philosophy of construction adjudication as it would deprive the contractor of cash while the judgment sum sat with the court and would not be available for distribution by liquidators. Therefore, if it is a proper method of security (the Court of Appeal reached no conclusion on this issue), it would be an option of last resort. 
• Any security needs to be an arrangement to protect the solvent party against cost orders, not the insolvent party. 
• Similarly, Insolvency Rule 6.42 (which provides for fees, costs and expenses incurred in the course of winding up to be treated as expenses of the winding up and for expenses incurred by the liquidator in legal proceedings to be prioritised over costs and expenses of the liquidation) is not of assistance as it prioritises expenses of the liquidator in proceedings brought by the liquidator, not costs and expenses incurred by the solvent party in pursuing proceedings. 

The judge remarked that this case was an example as to how not to go about offering security and a reminder that the basic building blocks of any security offer need to be met, namely – for what? by whom? on what terms? Each of these elements need to be in place before any such offer can be assessed by the offeree and the court.

The court also noted that the fact that the adjudication took longer than the statutory process envisages, supports the proposition that just because construction adjudication is quick and cheap does not make it an appropriate dispute resolution method in every case. We may start to see further judicial critique of parties' expansive approach to adjudication and aggressive approach to enforcement in light of this judgment.

Is an insolvent company entitled to enter judgment at all?

The second part of the Court of Appeal's judgment is obiter (opinion rather than binding) as the grounds of appeal were dismissed but, given its wider importance to the industry, the court went on to consider whether an insolvent company would be entitled to enter summary judgment at all.

The Court of Appeal noted that the Supreme Court in Bresco highlighted that the starting point is that summary judgment to enforce adjudicator's decision will frequently be unavailable when the claimant is in liquidation, with the court refusing it outright or granting judgment with immediate stay of execution. Where a liquidator sought summary enforcement, there could be a real risk it would deprive the respondent of the right to have recourse to the insolvent party's claim as security for its cross-claim and the court would again refuse summary judgment.

Lord Justice Coulson concluded that a company in liquidation could not enter judgment on the basis of a provisional decision where there was a continuing set-off and cross-claim. It is only in circumstances where the adjudicator has finally decided the net balance between the parties that consideration moves to offers of security. Where the decision remains provisional (as will usually be case unless the parties have agreed to a final determination) then there is a fundamental incompatibility between adjudication and insolvency, and the rights under the insolvency regime prevail (as noted in Meadowside).

In this case, the set-off and cross-claim had yet to be finally determined and therefore there was no entitlement to judgment on the sum only provisionally found due. The court noted that the provisional finding of an adjudicator, even on a final account dispute, cannot be treated as the final determination of the net balance in circumstances where the other party maintains its set-off and cross-claim. The question of security does not arise at this point; the insolvent party's cause of action has to be for the net balance only. Therefore, even if John Doyle's specific grounds of appeal had been successful, the Court of Appeal would have found that it was not entitled to summary judgment in any event.

The Court of Appeal went even further in confirming that even if summary judgment had been entered in favour of John Doyle, it would have granted a stay of execution, which Lord Justice Coulson considered to be the default position, consistent with the TCC approach to enforcement against parties in parlous financial positions. It would only be in the right case, if there was entitlement to summary judgment, that the default position could be set aside in favour of adequate ring fencing.

Osborne Clarke comment

The substance of the appeal in this case turned on the adequacy of the security offered by the insolvent party; undoubtedly the assignment of the claim to a funder added a layer of complexity and difficulty, which may impact on the funding of such claims.

However, the Court of Appeal's comments on the availability of summary judgment to insolvent parties is equally important and will severely limit the ability of insolvent parties to enforce adjudication decisions in all but the most specific circumstances, namely where:

• the parties agree that the decision of the adjudicator will be final and binding (it is unlikely a solvent party will subsequently agree to a binding decision in light of this decision); and
• the decision sought is for the net balance due between the parties: that is, there are no set-offs, cross-claims or substantive further proceedings.

The Court of Appeal sought to agree with the Supreme Court in Bresco that despite these limitations adjudication would not be futile for an insolvent party as summary judgment is not the only weapon available. For example, the respondent could be put on risk of indemnity costs if suitable cost protecting offers were made, or the insolvent party might be able to demonstrate entitlement to interim payments under Civil Procedure Rule 25 with robust case management leading to an efficient resolution of the remaining areas of dispute. However, it is difficult to see many insolvent parties utilising adjudication without the threat and benefit of the expedited enforcement procedure to which users have become accustomed.

What about the situation where there is a contractual obligation to adjudicate disputes before referring such disputes to court or arbitration? In light of this decision, it would seem that an insolvent party may be forced to issue two sets of proceedings (adjudication followed by litigation/arbitration) to obtain a final judgment that could be enforced.

Those insolvent parties who do continue to consider adjudication to resolve disputes would be well advised to read the health warnings set out in the judgment to avoid embarking on costly and time-consuming proceedings that cannot be enforced. Equally, solvent parties on the receiving end of any such claims are likely to carefully scrutinise the basis of the claims brought by an insolvent party, its own cross-claims and the adequacy of any security offered. There are likely to be many hurdles to trip insolvent parties going forward.