REUTERS | Michael Dalder

Successful adjudication enforcement in favour of an insolvent company

Hot on the heels of the Supreme Court’s decision in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd, in what may be the first summary judgment to enforce an adjudicator’s decision in favour of a party in administration, we have successfully represented the claimant in Styles and Wood Ltd (in administration) (S&W) v GE CIF Trustees Ltd.

Relying on the Supreme Court’s judgment in Bresco, S&W argued that the insolvency set-off rules did not trump a construction contract party’s right to adjudicate. Further, S&W proposed to fulfil the conditions of enforcement, as set out in Meadowside Building Developments Ltd (In Liquidation) v 12 – 18 Hill Street Management Co Ltd, with the joint administrators undertaking to ringfence the sum the adjudicator awarded and providing an ATE insurance policy to cover any potential adverse costs order in subsequent final determination proceedings.

The court accepted these arguments and decided in favour of S&W.

Styles and Wood Ltd (in administration) (S&W) v GE CIF Trustees Ltd

S&W was a Manchester-based fit-out firm who entered into a building contract with GE CIF Trustees Ltd (GECIF) for office to residential conversion works at St Ann’s Square Manchester. The contract incorporated the JCT Intermediate Building Contract with contractor’s design, 2011 Edition, subject to a schedule of amendments. The contract included an express adjudication clause.

Following practical completion, a dispute arose between the parties in respect of S&W’s final account. That dispute was referred to adjudication in February 2020. Part way through the adjudication S&W went into administration, but the adjudication continued. In April 2020, the adjudicator issued a decision that awarded a substantial sum to S&W.

GECIF refused to comply with the adjudicator’s decision on the ground of futility and sought a stay of execution. GECIF’s futility argument rested on Coulson LJ’s Court of Appeal judgment in Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd (which Lord Briggs overturned in the Supreme Court), where he had held that:

“In the circumstances of this case, an adjudicator’s decision in favour of Bresco, a company in insolvent liquidation facing a separate cross-claim, will not be capable of being enforced. That would make the adjudication an exercise in futility.”

S&W brought enforcement proceedings, which were heard on 4 September 2020 before HHJ Parfitt.

The legal arguments

The enforcement hearing proceeded in light of the Supreme Court’s judgment in Bresco, where Lord Briggs had held that the adjudication of disputes under construction contracts cannot be injuncted or restrained on the ground of a party’s insolvency and that any issues as to insolvency will be addressed at the enforcement stage:

“The starting point… is that the insolvent company has both a statutory and a contractual right to pursue adjudication as a means of achieving resolution of any dispute arising under a construction contract to which it is a party, even though that dispute relates to a claim which is affected by insolvency set-off. It follows that it would ordinarily be entirely inappropriate for the Court to interfere with the exercise of that statutory and contractual right. Injunctive relief may restrain a threatened breach of contract but not, save very exceptionally, an attempt to enforce a contractual right, still less a statutory right.” (Paragraph 59.)

“The proper answer to all these issues about enforcement is that they can be dealt with, as Chadwick LJ suggested, at the enforcement stage, if there is one. In many cases, the liquidator will not seek to enforce the Adjudicator’s decision summarily. In others the liquidator may offer appropriate undertakings, such as to ringfence any enforcement proceeds: see the discussion of undertakings in the Meadowside case. Where there remains a real risk that the summary enforcement of an adjudication decision will deprive the respondent of its right to have recourse to the company’s claim as security (pro tanto) for its cross-claim, then the Court will be astute to refuse summary judgment.” (Paragraph 67.)

Lord Briggs recognised Adam Constable QC’s approach in Meadowside, and the requirements for satisfactory security for enforcement in favour of a party in liquidation. In Meadowside, these were described as being an exception to the ordinary position in circumstances where:

  • Satisfactory security is provided in respect of:
    • any sum awarded in the adjudication that is enforced, so that it is repayable should the responding party successfully overturn the adjudicator’s decision in litigation or arbitration; and
    • any adverse order for costs made against (or agreed by) the company in liquidation in favour of the responding party in respect of any unsuccessful application to enforce the adjudication decision* and the subsequent litigation or arbitration, in which the responding party is seeking to overturn the adjudication decision.
  • It will be a question of fact what is satisfactory as security in form, duration and amount, and it may be provided incrementally (as it would be, for example, in any security for costs application). A combination of the following solutions might be appropriate:
    • the liquidator undertaking to the court to ringfence the sum enforced so that it is not available for distribution for the relevant duration;
    • a third party providing a guarantee or a bond; or
    • ATE insurance.

(*It is worth noting that the reference to providing security for the costs of the enforcement hearing no longer applies because, in Bresco, Lord Briggs held that a statutory or contractual adjudication could not be injuncted or restrained. It follows that each party has a right to seek to enforce an adjudicator’s decision and does not have to provide security for the costs of enforcement.)

What security would satisfy the Meadowside test?

In this case, the security put forwarded by S&W took the form of:

  • An ATE insurance policy to cover a potential adverse costs order in any subsequent final determination proceedings.
  • An undertaking by S&W’s joint administrators to ringfence the sums awarded by the adjudicator.

The joint administrators (acting on behalf of the company) provided such an undertaking, as themselves officers of the court, to ringfence the enforcement sums pending the resolution of any final determination proceedings. In effect, this means that GECIF has a period following enforcement within which to bring arbitration proceedings and, if they were to do so, the funds would remain held pending the outcome of those proceedings. If not, the funds could subsequently be released to the joint administrators to administer in accordance with the process of the administration.

In response, GECIF attempted to raise a number of issues including complaints about S&W’s financial position, the assertion that final determination proceedings would shortly be commenced and various complaints about the substance of the adjudicator’s decision.

A key objection was that the level of cover secured by the ATE insurance policy was inadequate. GECIF argued that the likely costs that GECIF could be awarded in arbitration would be five times that of the level of ATE insurance.

S&W made various submissions on the level of costs anticipated by GECIF in any final determination proceedings and the level of ATE cover required.

HHJ Parfitt agreed with S&W’s submissions. He referred to GECIF’s broad-brush approach in respect of the level of costs to be wholly unpersuasive and that their cost breakdown seemed neither serious nor substantive.

GECIF also referred to concerns about the wording and substance of S&W’s ATE insurance policy and proposed undertaking for the ringfencing, arguing that these rendered the security as inadequate. During the proceedings, S&W addressed the concerns with amendments being made to the ATE insurance policy and the provision of supplementary undertakings from the joint administrators of S&W.

GECIF also unsuccessfully argued that there were defects in the works that had not been determined by the adjudicator’s decision, which meant it did not comprise a net balance of the dealings between the parties in accordance with clause 14.25 of the Insolvency Rules.

The judge found in favour of S&W. He enforced the adjudicator’s decision and refused a stay on condition that the ATE insurance policy at the current level provided by S&W remains in force and the joint administrators provide the necessary undertakings to ringfence the sum until the conclusion of any appeal process from the arbitrator’s award.

As far as we are aware, this is the first case in which an insolvent party has successfully enforced an adjudicator’s decision since the Supreme Court decision in Bresco. It was also heard before the judgment in John Doyle Contractors Ltd v Erith Contractors Ltd was made available. However, we think there are important distinctions between our approach to the types of security proffered by S&W compared to that of John Doyle. The assignment of the claim to a litigation funder such as Pythagoras Capital (as in Bresco and Meadowside) or Henderson & Jones (as in John Doyle v Erith) also creates added difficulty when it comes to the practical application of the Meadowside conditions, difficulties we did not have to deal with.

The Myerson’s team was led by Neil Armstrong and Jack Duncanson with Riaz Hussain QC of Atkin Chambers as counsel.

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