Adjudication: Obstacles for liquidators and administrators

John Doyle Construction Limited v Erith Contractors Limited

01 October 2020

Author: John Dugdale
Practice Area: Construction Law

Law_books_(2)

In June 2020 we wrote about the decision of the UK Supreme Court in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd. That case confirmed that that an adjudicator does have jurisdiction to deal with a dispute referred by a company in liquidation or administration.

However, a recent decision of the High Court in England has shown that there may still be a number of obstacles for liquidators and administrators to overcome if they are to be able to enforce an adjudicator’s decision.

Background

Whilst ‘Super Saturday’ and Jessica Ennis, Greg Rutherford and Mo Farah all winning gold at London 2012 seems like a lifetime ago, this case arose out of landscaping works at the Olympic Park. A claim was brought by John Doyle Construction Limited (JDC) against Erith Contractors Limited (Erith) for sums allegedly due on its final account. JDC entered into liquidation in June 2013. In June 2018, JDC started an adjudication through which it obtained a decision that it was due c. £1.2 million despite JDC having claimed c. £4 million.

JDC sought to enforce that adjudicator’s decision in the High Court in England. The Court was faced with setting out the principles that govern a party in liquidation seeking to enforce an adjudicator's decision in its favour.

The Law - Adjudication

The Construction Contracts (Northern Ireland) Order 1997 (the 1997 Order) is the legislation that governs adjudication and payment in ‘construction contracts’ in Northern Ireland.

Under the 1997 Order, a party to a ‘construction contract’ has a statutory right to refer a dispute to adjudication at any time. The intention of adjudication was to give parties to construction contracts quick answers to disputes, often during construction projects, and to get money moving through the supply chain.

An independent adjudicator is appointed, and gives a decision within 28 days from referral of the dispute. That decision is then binding on the parties on an interim basis, this is until the dispute is finally resolved through litigation, arbitration or agreement.

Adjudication - Enforcement

Adjudicator’s decisions are enforced in the Courts of Northern Ireland through a process known as summary judgment. A party seeking to enforce an adjudicator’s decision applies to the Court for judgment without the need for a full trial. The Commercial Hub, a specialist forum within the High Court, in which designated Judges hear disputes where the parties are businesses (aims to hear such applications within 4 weeks).

Decision

The Court set out the principles to be applied when considering an application for summary judgment on an adjudication decision in favour of a company in liquidation, as follows:

1. Is the dispute in respect of which the adjudicator has issued a decision one in respect of the whole of the parties' financial dealings under the construction contract in question, or simply one element of it?

On the face of it, this test appears to limit the adjudicator’s decisions that can be enforced by insolvent companies to decisions in respect of final account disputes. The Judge expressly excluded “small, or tightly defined, disputes … [referred] to adjudication for tactical reasons” and decisions in so-called “smash and grab” adjudications.

2. Are there mutual dealings between the parties that are outside the construction contract under which the adjudicator has resolved the particular dispute?

There may be dealings between the parties that are outside the realms of a particular construction contract, including amounts due on other contracts.

3. Are there other defences available to the defendant that were not deployed in the adjudication?

Mutual dealings on other contracts, or other defences, if they have not been taken into account by the adjudicator, will be taken into account by the Court on the summary judgment application. The Judge noted that the second and third principles might be different ways of saying the same thing.

4. Is the liquidator is prepared to offer appropriate undertakings, such as ring-fencing the enforcement proceeds?

No undertakings at all were offered from the liquidators.

5. Is there is a real risk that the enforcement of an adjudication decision will deprive the paying party of security for its cross-claim?

Again, the Judge considered that the fourth and fifth principles might be different ways of saying the same thing. This was the real battleground of the enforcement application. Two mechanisms were put forward by JDC to persuade the Judge that there was no such risk, a draft letter of credit; and an After the Event (or "ATE") insurance policy.

The Judge also found that the ATE insurance policy, which contained “a number of material exclusions and avoidance clauses”, was inadequate security.

In short, the Judge found that the security available was insufficient. Therefore, summary judgment in respect of the adjudicator’s decision was not available to JDC.

Carson McDowell View

Although the judgment was given by an English Court, it is likely to be persuasive to a Court in Northern Ireland tasked with determining the same issue.

Whilst the Supreme Court has opened the door to adjudications by insolvent companies, this case is a timely reminder that insolvency practitioners will need to carefully consider whether they are able to offer the security that will be required by the Courts. In the absence of adequate security, any adjudicator’s decision may not be enforceable.

That said, adjudication was designed to be a speedy and cost effective dispute resolution process, and could still provide a useful alternative to Court proceedings for administrators and liquidators in the right circumstances.

Finally, the Judge was apparently sceptical of the lapse in time between the constructions works prior to the 2012 Olympics, the adjudication in 2018, and the Court hearing in 2020. He noted that the English Court’s accelerated process for enforcing adjudicator’s decisions may not be appropriate in cases where the project itself was carried out many years in the past. The Commercial Hub has not yet made a similar distinction, but it will interesting to see what approach is taken is any future enforcement of an adjudicator’s decision on an historic project.

If you have any queries the Construction team at Carson McDowell would be happy to help.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

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