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The landscape after Bresco continues to evolve

You must have been in isolation if you haven’t heard or read about the Supreme Court’s decision in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd. It has been hailed by some as opening the floodgates to adjudications by insolvent companies. But, as a series of recent judgments show, there remain a number of obstacles that need to be overcome by insolvent entities seeking to enforce an adjudication award. Fraser J’s judgment in John Doyle Construction Ltd v Erith Contractors Ltd is the latest in line.

Background

Fraser J, you will recall, decided Bresco v Lonsdale at first instance. He granted an injunction to Michael J Lonsdale who sought to stop Bresco (a company in insolvent liquidation) from adjudicating.

In the Court of Appeal, Coulson LJ  held that, although an adjudicator did have jurisdiction to decide an adjudication brought by an insolvent party, an adjudication in those circumstances would be an “exercise in futility” as such decisions were unlikely to be enforced.

Finally, in June 2020, the Supreme Court allowed Bresco’s appeal, deciding that an insolvent party could commence an adjudication. It would fall to the TCC to decide at the enforcement stage whether an adjudicator’s decision in favour of an insolvent company should be enforced and, if so, whether a stay of execution should be granted.

Before the Supreme Court handed down its judgment, Adam Constable QC (sitting as a deputy High Court Judge in the TCC) decided in Meadowside Buildings Development Ltd v 12-18 Hill Street Management Co Ltd that, following the Court of Appeal decision in Bresco, it was open to the court to enforce an adjudicator’s decision in favour of an insolvent company. There, the judge held that the requirements for enforcement were not met, and he declined to enforce the decision. Adequate security had not been provided to the losing party, either in relation to the amount awarded in the adjudicator’s decision, or in relation to its legal costs of bringing a claim to recover that amount.

John Doyle Construction v Erith Contractors – the facts

This case concerned a summary judgment application brought by insolvent company John Doyle Construction Ltd (JDC) to enforce an adjudicator’s decision in its favour. The hearing was originally listed for 17 June 2020, the same day as the Supreme Court judgment was handed down in Bresco v Lonsdale. Sensibly, Fraser J postponed the application hearing to 2 July 2020, so that he would have the benefit of the judgment in Bresco.

JDC’s dispute with Erith related to hard landscaping work that it had carried out on the London Olympic Park way back in 2012. JDC went into administration on 21 June 2012, and liquidators were appointed in 2013. An agreement was reached with funders in 2016 and an adjudication was commenced in 2018. JDC claimed £4 million but was awarded only £1.2 million and, following the Court of Appeal decision in Bresco, it had applied to enforce that decision. Erith resisted the application.

In a characteristically well-reasoned judgment, Fraser J found in favour of Erith and declined to enforce the adjudicator’s decision. He decided that JDC had provided inadequate security for Erith’s cross-claims, as well as inadequate security for Erith’s costs of bringing such a claim. In reaching his decision, Fraser J made some interesting points that are of wider application to the industry in the aftermath of Bresco.

Conclusions

Fraser J gave detailed consideration to the authorities on this issue, including Lord Briggs’ judgment in Bresco, noting that adjudication is a useful process for ascertaining the net balance due between the parties and that, in many cases, the liquidator will not seek to enforce, for example where an adjudicator is asked to decide whether there has been a repudiatory breach of contract.

Where a liquidator does seek to enforce, Lord Briggs accepted that there will be difficulties in enforcement and recognised that the court at enforcement stage may have good reasons not to enforce the decision, or to enforce it but at the same time grant a stay of execution of the judgment sum.

Fraser J has put his own stamp on the Bresco decision by setting out five principles to consider when hearing an application to enforce an adjudicator’s decision in favour of an insolvent company:

  • Has the adjudicator considered the entire financial dealings between the parties under the construction contract? For example, tightly defined “smash and grab” adjudicators’ decisions will not be enforced.
  • Are there any dealings between the parties that are outside the realms of the construction contract, such as personal injury matters? He recommends that adjudicators should avoid deciding such matters as they are outside an adjudicator’s jurisdiction, unless the parties agree otherwise.
  • Are there any defences that were not deployed in the adjudication? The judge noted that the second and third principles might be different ways of saying the same thing.
  • Is the liquidator prepared to offer appropriate undertakings such as ring-fencing the sum in question?
  • Is there a risk that enforcing the decision will deprive the losing party of security for its cross-claim? Again, Fraser J considered that the fourth and fifth principles might be different ways of saying the same thing.

Fraser J suggested that, taken together, the effect of these principles will be that the type of adjudicator’s decision in favour of an insolvent party that is suitable for enforcement will be limited to final account disputes, which are quite unusual.

Fraser J noted that adequate security must be offered in relation to any cross-claims the losing party might have, and which were not considered in the adjudication. Given the nature of insolvency set off, these cross-claims would by definition include the right to seek a final resolution of the underlying dispute in litigation (or arbitration, depending on the contract).

Here, Fraser J considered in detail the adequacy of the security offered and made a number of observations:

  • There was no offer to ring fence the sums awarded by the adjudicator in a special account pending final determination proceedings.
  • JDC did not rely on a letter of credit from funders, but rather a letter of intent to apply to a bank for credit, on receipt by the funders of the whole of the sum applied for. Fraser J noted that this was not the same thing at all, and indeed was contrary to the terms of the ATE insurance policy.

He also found that the ATE insurance policy offered by JDC as security for Erith’s costs of bringing its cross-claims was inadequate (albeit he characterised security for costs as secondary to security for the sum of the adjudicator’s decision):

  • In accordance with Premier Motorauctions Ltd v Price Waterhouse Coopers LLP, exclusions in an ATE policy can lead to a significant risk of the policy being avoided, which has led to the courts declining to accept such policies as security in the absence of an anti-avoidance clause. He found that JDC’s ATE cover had a number of material exclusions and avoidance clauses.
  • The ATE policy was premised on JDC being paid the whole of any damages obtained (contrary to the funding agreement, which provided that JDC would only obtain 45% of any damages awarded).
  • The ATE policy covered JDC’s costs of it bringing a claim, not of it defending a claim brought by Erith to recover the underlying sum.

For these reasons the judge considered that inadequate security had been offered for Erith’s legal costs and declined to grant summary judgment of the adjudicator’s decision. He noted that he based his judgment on the facts but that, if he was wrong, he would have granted a stay, in accordance with the principles set out in Wimbledon v Vago.

As was made clear in Meadowside, any funding arrangement which falls foul of the Damages Based Agreement Regulations 2013 (DBAR 2013) may render the enforcement proceedings an abuse of process. In obiter comments, Fraser J considered JDC’s funding arrangement may be unenforceable for a contravention not only of regulation 4, DBAR 2013, which requires the funded party to receive at least 50% of the damages, but also of regulation 3c, which requires the funding agreement to set out the reasons why the level of damages has been decided upon.

Finally, the judge was critical of the procedure adopted in this case. He noted that the TCC has introduced an accelerated process for enforcing adjudicator’s decisions, intended to protect cash flow for construction companies. However, it was not appropriate for claimants to benefit from this accelerated process where the project itself was carried out many years ago, and where the claimant is either an insolvent company, its liquidator, or a funder.

The landscape after Bresco

So, what does this mean for the future?

Meadowside and JDC v Erith are important decisions for liquidators, funders and ATE insurance providers, who will need to consider carefully whether they can offer the level of security required by the courts. In addition, there are a number of questions raised in these judgments, to which the industry will require answers. Finally, at some point (it seems) we can expect a rewrite of the TCC Guide to include restrictions on using the “adjudication business” provisions to enforce decisions relating to historic projects.

Edward and Hadley instructed Riaz Hussain QC on behalf of Erith Contractors Ltd.

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