Tom Ames and Michael Maris examine the Court of Appeal decision in John Doyle Construction Limited (In Liquidation) v Erith Contractors Limited  EWCA Civ 1452, one of the most significant construction cases of 2021.
The Court of Appeal’s decision in John Doyle Construction Limited (In Liquidation) v Erith Contractors Limited  EWCA Civ 1452 has cast further light on the relationship between insolvency and adjudication enforcement. The case is among the first to deal with the issue of insolvent parties and adjudication since the Supreme Court’s decision in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd  UKSC 25, in which it was held that an insolvent company retains the right to pursue adjudication.
The Court of Appeal decided that the security offered for the other party’s cross-claims by John Doyle Construction Ltd (“JDC”) was insufficient to enforce the adjudication decision, and that any security offered in such cases had to be “clear, evidenced and unequivocal”. Coulson LJ’s judgment also considered the broader issue of 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, is entitled to summary judgment at all. Significantly for practitioners, Coulson LJ found that companies in this position are not entitled to summary judgment, for the reasons set out below.
The Facts and Decision at First Instance
The appellant, JDC, was a construction company which had been in liquidation since 2013. JDC’s dispute with the respondent, Erith Contractors Ltd (“Erith”), centred on a sub-contract for works at the Olympic Park in London (“the Sub-Contract”). Shortly prior to the completion of the Sub-Contract works, JDC entered into administration and ceased work. Following this, a dispute arose as to the value of JDC’s final account. JDC sought to pursue Erith for £4 million they claimed to be due, and attempted to assign their claim to a litigation funder, Henderson & Jones (“HJ”). Erith denied the claim and submitted that JDC had already been paid out more than £3 million too much.
The adjudicator decided in JDC’s favour, in the sum of around £1.2 million, and Erith immediately challenged the decision by way of a Notice of Dissatisfaction. JDC then submitted a letter before claim which tacitly recognised that, if Erith paid out the adjudication sum to JDC, the money could be distributed, and that little would be recovered if it transpired that the adjudicator had been wrong. The security offered by JDC’s liquidators for the adjudication sum was a letter of credit and an ATE insurance policy. When JDC finally issued their claim form to enforce the summary judgment, it made no reference to ring-fencing the sum following the judgment.
The judge at first instance decided that the security offerings from HJ (the letter of credit and the ATE insurance policy) were inadequate. No issue was taken with this aspect of his decision. However, JDC submitted on appeal that the judge should have accepted another form of security from the liquidators, namely the offer to pay the judgment sum into an escrow account or into the court.
The Court of Appeal’s Decision
Regarding the case-specific issue of the adequacy of JDC and their liquidators’ security, Coulson LJ agreed with the judge at first instance that the letter of credit and the ATE policy were not adequate security. More significantly, Coulson LJ held that there had never been a formal offer by JDC and their liquidators to pay the judgment sum into an escrow account or into the court (which might have ring-fenced the sum and acted as valid security) since such an offer would have contradicted JDC’s intention to hand over the judgment sum to the litigation funders, HJ. Consequently, the Court of Appeal upheld the decision that insufficient security had been offered for the judgment sum.
Coulson LJ explained that there is a burden on claimants in enforcement applications to submit succinct and simple claim forms, and take all steps to ensure that the hearing is as efficient as possible. For claimants in liquidation, where there is the potential for debate to arise before the judge at the enforcement stage, it is vital that “any undertakings or security being offered by a claimant company in liquidation need to be clear, evidenced and unequivocal”. Coulson LJ further indicated that this requirement includes offers to “ring-fence [the adjudication award] or otherwise protect it”.
Coulson LJ also dismissed two other grounds of appeal relating to the issue of security for Erith’s costs in future actions, which are not analysed in-depth in this article.
Following this, in obiter comments, Coulson LJ delved into the underlying question of whether a company in liquidation is entitled to enter summary judgment, without regard to the paying party’s set-off and counterclaim. This discussion answered the hypothetical question as to whether, if JDC had offered adequate security to Erith, they would have been entitled to enter judgment enforcing the adjudicator’s decision.
Coulson LJ outlined the relevant authorities on this issue, in particular the Supreme Court’s decision in Bresco, where it was held that a company in liquidation could commence adjudication proceedings, and this was not a futile exercise. Coulson LJ noted that, in obiter comments in Bresco, Lord Briggs had found that summary judgment for enforcement will frequently be unavailable when the claimant is in liquidation. Coulson LJ’s analysis of the judgment in Bresco led him to the conclusion that there was nothing in Bresco which indicated that a company in liquidation was entitled to enter judgment on the basis of a provisional adjudication decision where there was a continuing set-off and cross-claim.
Regarding the issue of what security might be considered adequate when a company in liquidation seeks to enforce an adjudication decision, this judgement tells us that the security offered should be “clear, evidenced and unequivocal”. Where there is an offer to ring-fence the money or otherwise protect it, such a process must also be “unequivocal”. Practitioners should note that it was not enough to raise the issue of ring-fencing during the oral submissions before the judge at first instance. Coulson LJ also indicated that JDC’s vague and conditional offers to Erith’s solicitors were not sufficient. Instead, in the words of Coulson LJ, “it must be beyond argument what has been offered any why”.
The case also has wider implications for practitioners who deal with issues around insolvency and adjudication. Following Bresco, where it was held that an “Insolvent company has both statutory and contractual right to pursue an adjudication”, John Doyle Construction clarifies that the Insolvency Rules remain paramount. Coulson LJ’s judgment illustrates that an adjudicator’s decision – even one which concerns a final account dispute where no other significant claims arise – cannot be treated as if it were a final determination of the net balance, and insolvency set-off must apply. Therefore, where the defendant maintains a cross-claim, a party in liquidation cannot apply for summary judgment for an adjudication decision in their favour.
As a result of all this, cases will arise when an insolvent claimant must undertake adjudication even though they will be unlikely to obtain summary judgment for the adjudicator’s decision. As observed in Bresco, however, it is not futile for an insolvent company to pursue adjudication even if they will not be able to enforce it. For example, following the adjudication decision, it is open to an insolvent claimant to make the claim again in full, with the defendant on the back foot because of the adjudicator’s decision against them . Indeed, Coulson LJ observed repeatedly that, if JDC had sought to pursue this course, the trial of the action would have been completed long before the Court of Appeal handed down its decision on the enforcement issue.