It seems that adjudication under the Housing Grants, Construction and Regeneration Act 1996 has been butting heads with key principles underpinning the insolvency regime ever since the Act came into force on 1 May 1998.
On the one hand, you have the pay-now-argue-later concept at the heart of the Construction Act. Absent some limited grounds of challenge (of which the fact the adjudicator lacked the jurisdiction to reach the decision they made is the most commonly argued), an adjudicator’s award is temporarily binding on the parties and can be enforced in the courts by way of summary judgment. The losing party must pay and look to recover that money through subsequent negotiation, alternative dispute resolution, litigation or arbitration (depending on the dispute resolution provisions of the contract in question).
On the other, you have insolvency set-off, a principle that applies automatically on insolvency. That requires the calculation of the precise balance that is owed by or to the insolvent entity and each of its creditors. It is only that balance that is a relevant consideration in the insolvency.
Key point
- The Court of Appeal has cast doubt on the practical ability of an insolvent company to enforce an adjudicator’s award in its favour
By way of example: Tom Ltd and Jerry PLC have entered into two contracts. Tom owes Jerry £10 under the first contract. Jerry owes Tom £8 under the second. Jerry becomes insolvent and Tom is an unsecured creditor in that insolvency. Absent insolvency set-off, Tom would have to pay Jerry’s liquidator the full £10 under the first contract and look to claim in Jerry’s insolvency for the £8. If Jerry’s debts exceed its assets (as is sadly often the case in insolvency), Tom may just end up with a distribution of a few pence in the pound (if anything) in relation to that £8 claim while also having had to part with the full £10. However, with the benefit of insolvency set-off, Tom is better off. The two amounts are set-off against each other so that Tom only has to pay Jerry’s liquidator £2, which is the actual balance owing between them. Tom keeps the other £8.
But what happens if Jerry, despite being insolvent, has won an adjudication against Tom under the first contract? That decision is only temporarily binding and is not (unless Tom and Jerry both agree that it is) a final determination of the dispute. Should Jerry’s liquidator be able to enforce the award?
If Jerry was not insolvent, the fact that Tom disagreed with the adjudicator would not stop Jerry being able to enforce the award, leaving Tom to fight the dispute again at a later date until it was finally resolved. But Jerry is insolvent and, if Tom pays the money and is subsequently able to prove that the adjudicator was wrong, what are the chances of Tom recovering that overpayment as an unsecured creditor in Jerry’s insolvency? Should the courts enforce the adjudicator’s award?
Bresco
That question was arguably resolved, at least in principle, by the Supreme Court in Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25; [2020] EGLR 29 (see Applying the Bresco ruling so insolvent companies can adjudicate a dispute, EGi, 13 January).
At first instance, and on appeal, the courts had granted an injunction stopping Bresco’s liquidators from commencing adjudication because any award would not be enforceable and the court could and should restrain any adjudication until the liquidators had calculated the net balance due after insolvency set-off.
The Supreme Court robustly disagreed. Lord Briggs, who gave the leading judgment, stressed the right to refer a dispute to adjudication was both statutory (under the Construction Act) and contractual (when the terms of the contract in question comply with the Act’s requirements regarding adjudication). And Lord Briggs stressed that, having agreed with the Court of Appeal (which overturned the first instance judge on this issue) that an adjudicator did have jurisdiction to consider a claim brought by an insolvent entity, the courts rarely grant injunctions to restrain the exercise of statutory and/or contractual rights: “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.”
However, the Supreme Court also acknowledged that, just because an insolvent party could commence an adjudication, it did not mean it would automatically be able to enforce an adjudicator’s award by way of summary judgment. Lord Briggs, endorsing Chadwick LJ’s judgment in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] EWCA Civ 507 (the first judicial consideration of the tension between adjudication and insolvency), emphasised that the question of enforcement should be dealt with by the court considering the summary judgment application. That court could enforce the award in certain circumstances (for example, if Tom’s claim against Jerry for £8 proved to be worthless) or it could refuse to grant summary judgment. Alternatively, the court could enforce the award, but order a stay of execution pending a proper analysis of both companies’ claims against each other.
Applying Bresco
The judgment of Fraser J (who was also the first instance judge in Bresco) in John Doyle Construction Ltd (in liquidation) v Erith Contractors Ltd [2020] EWHC 2451 (TCC); [2020] PLSCS 175 (see www.egi.co.uk/legal/applying-the-bresco-ruling-so-insolvent-companies-can-adjudicate-a-dispute/) was the first judicial consideration of Bresco following the Supreme Court’s judgment. John Doyle, which was in liquidation, applied to enforce an adjudicator’s award in its favour by way of summary judgment.
Fraser J, applying Bresco, rejected that application. The judge suggested some principles for the courts to consider before granting any such application which, taken together, meant that an insolvent company would only succeed in a summary application (i) if it is a final account dispute covering all of the issues under the contract; (ii) where cross-claims under other contracts and defences not considered by the adjudicator have been included; and (iii) there is no real risk that paying the money to the company in liquidation will deprive the paying party of security for its cross-claim.
Doyle’s appeal against that decision (on the basis of the adequacy, or otherwise, of the security it had offered as a quid pro quo for Erith having to pay the adjudicator’s award to an insolvent company) was considered by Lewison, Coulson and Edis LJJ ([2021] EWCA Civ 1452). The security was inadequate and the appeal was rejected.
An adjudicator’s decision is provisional
What is particularly interesting about the decision is that both Coulson LJ (who gave the leading judgment) and Lewison LJ disagreed with (or at least sought to finesse) part of Lord Briggs’s decision in Bresco. In particular, the judges were concerned with the fact that an adjudicator’s award is only temporarily binding on the parties. As such, Coulson LJ stressed it “cannot therefore be regarded as the final determination of the net balance” due between the parties when one of them is insolvent. Both judges felt that Lord Briggs’ comments about enforcement were obiter dicta and, as such, not binding on them.
Coulson LJ was particularly concerned to dismiss the idea that Lord Briggs had endorsed the idea that an insolvent company could successfully apply for summary judgment of an adjudicator’s award where there were continuing claims or cross-claims. Nor had Lord Briggs sought to suggest that an adjudicator’s award was anything other than provisional.
Further, the judge was sceptical as to whether there was any benefit in paying the adjudicator’s award into court pending final resolution of the dispute: “… an order requiring payment of such monies into court is the worst of all possible worlds. It is contrary to the underlying philosophy of construction adjudication because, instead of maintaining construction industry cash flow, it would deprive Erith – a working contractor – of cash, while leaving the money sitting uselessly in the court’s account. It would not be available for distribution by the liquidators of [John Doyle], so it is difficult to see how it is of any benefit to them.”
Conclusions
While that argument tiptoes around the fact that paying the money into court achieves one of the objectives of adjudication – that the losing party should pay now and argue the merits of recovering that money later – the opinions of Coulson LJ, a judge whose entire career has been spent in construction law and who writes the leading textbook on construction adjudication, are of huge significance, especially given the erudite support of Lewison LJ.
Two of our judges have distinguished a landmark Supreme Court judgment and, on one interpretation, rendered it rather toothless. What benefit is there to an insolvent company of being able to win an adjudication if it can rarely, if ever, enforce it? On the other hand, are there ways to defeat the concerns of Coulson and Lewison LJJ? And what of Fraser J’s analysis as to when an insolvent company might be successful. They were not expressly referred to by the Court of Appeal.
I expect more litigation. Despite Bresco, the issue that has bedevilled Construction Act adjudication since its inception will remain an issue for some time to come.
Stuart Pemble is a partner at Mills & Reeve