An insolvent party’s right to commence adjudication – Bresco applied

The Technology and Construction Court has handed down the first significant judgement following the Supreme Court decision in Bresco which considered the circumstances in which an insolvent party has the right to commence adjudication proceedings.

In doing so, the Court has provided useful guidance on the principles that a court will consider on an application for enforcement of an adjudication award by an insolvent party, including the question of what will amount to adequate security in the event it is later established that the insolvent party is not entitled to be paid any sums awarded by the adjudicator (and those sums, in full or in part, need to be repaid).

Breso in the Supreme Court

In Bresco Lord Briggs explained in clear terms that whilst insolvent parties do have a right to commence adjudication proceedings, the question of whether or not a decision in favour of an insolvent party would be enforced will fall to be considered by the court at the enforcement stage.

Bevan Brittan commented on the Supreme Court decision in June 2020 and our article can be found here.

John Doyle Construction Limited (in liquidation) v Erith Contractors Limited  

This case concerned a final account dispute over landscaping works carried out the Olympic Park in advance of the London 2012 Olympics. John Doyle Construction Ltd (JDC) entered administration as long ago as June 2012 and but the adjudication proceedings did not follow until 2018.

Over time, the right to the proceeds of an adjudication were sold to a third party, Henderson Jones, who (it appears from the judgment) were ostensibly controlling the adjudication and subsequent enforcement proceedings. The judgment includes a number of interesting observations about the arrangements between the liquidators of JDC and Henderson Jones.

Guidance

Mr Justice Fraser acknowledged that following Bresco the availability of adjudication to insolvent parties may offer “real value” as parties may often be able to resolve the underlying dispute swiftly and cost-effectively. However, the Judge highlighted the practical difficulties that may arise and set out five clear principles for the courts to consider on any application for summary judgment by an insolvent party:

1. Whether the dispute is in respect of the whole of the parties' financial dealings under the construction contract, or one element of it; 
2. Whether there are mutual dealings between the parties that are outside the construction contract; 
3. Whether there are other defences available that were not deployed in the adjudication; 
4. Whether the liquidator/insolvency practitioner is prepared to offer appropriate undertakings, such as ring-fencing the enforcement proceeds, and/or where there is other (i.e. third party) security available; 
5. 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.

Application

Having regard to these five principles, Fraser J then identified three sets of circumstances in which summary judgment may be available to an insolvent party seeking to enforce an adjudicator's award:

1.  Where the decision of the adjudicator would have to resolve all elements of the overall financial dispute between the parties;
2. Where mutual dealings on other contracts, or other defences, which have not been taken into account by the adjudicator, will be taken into account by the court on the summary judgment application;
3. Where there is no "real risk" that summary enforcement of the adjudicator's decision would deprive the paying party of security for any cross-claim.

In this case, Fraser J concluded that the security provided by Henderson Jones in the form of a letter of intent and an ATE insurance policy was insufficient. In this case, there was no letter of credit (only a letter of intent to apply for credit in the future) and the cover offered by the after the event (ATE) insurance policy was insufficient to meet any future adverse costs.

In summary the security offered was inadequate and did not provide "reasonable assurances” to Erith that, should it successfully overturn the adjudicator's decision, the beneficiary of the adjudication decision (i.e. Henderson Jones) would be able to repay any sums awarded or meet any adverse costs orders. The Court noted that the required level of security should place Erith in a similar position to that which it would occupy if JDC were solvent.

Comment

The circumstances in which insolvent parties are able to use adjudication as an effective means of dispute resolution remains a developing areas of law. The judgement in JDC highlights the practical difficulties associated that an insolvent party will face in seeking to enforce an adjudicator’s award and the high hurdles that such parties will need to overcome.

In addition, the Court confirmed that cases involving insolvent parties, which usually concern historical claims, are unlikely to be suited to the abridged, fast-track enforcement procedure for adjudication decisions that would otherwise be available to solvent parties. This may mean that even where the conditions set out by the TCC are met and an insolvent party is able to provide adequate security, expedited or swift summary enforcement may still not be available.

By Matthew Phipps and Alex Ankers