High Court applies Bresco and sets a high bar for companies in liquidation to overcome to enforce adjudicator’s decisions

Our team: Digby Hebbard

The Supreme Court’s judgment of June this year in Bresco v MJ Lonsdale attracted considerable publicity.  The Supreme Court decided that the statutory adjudication and insolvency regimes were not incompatible and as such, liquidators were permitted to pursue claims through adjudication.

Although the right to pursue claims through adjudication is one thing, enforcing an adjudicator’s decision is another thing entirely.  On this issue of enforcement, the material extract from the leading judgment of Lord Briggs of the Supreme Court is (at paragraph 67):

Where there remains a real risk that the summary enforcement of an adjudication will deprive the respondent of its right to have recourse to the company’s claim as security (pro tanto) for its cross-claim, then the court will be astute to refuse summary judgment”.

Following a recent decision by Mr Justice Fraser in the Technology and Construction Court in John Doyle Construction (In Liquidation) v Erith Contractors Ltd [2020] EWHC 2451 (TCC), there is now some helpful guidance as to how the courts are likely to interpret and apply Lord Briggs’ findings when companies in liquidation seek to enforce adjudicator’s decisions.  In short, companies in liquidation have a very high bar to overcome.

The background to JDC v Erith is that in 2010, JDC were engaged by Erith to carry out landscaping works.  JDC carried out works under the contract before entering voluntary liquidation in 2013.  Erith did not subsequently accept the liquidator’s assertions that JDC were due sums under the contract.  In late 2016, the liquidators of JDC purported to assign its claim against Erith to a company, Henderson Jones, whose business is said to be to “purchase [legal] claims for immediate money and a share of the proceeds”.    In January 2018, JDC commenced an adjudication against Erith and the adjudicator awarded Erith c£1.2m in his decision of June 2018.  In April 2020, JDC commenced proceedings seeking summary judgment to enforce the adjudicator’s decision.

Mr Justice Fraser acknowledged concerns raised by the Supreme Court in such cases, specifically, the potential injustice where a company in liquidation obtains summary judgment and the money paid to it would not subsequently be available to be repaid, should it turn out that the adjudicator was wrong.  Lord Briggs highlighted in Bresco that such injustice might be overcome if liquidators were to offer appropriate undertakings, such as ring-fencing the enforcement proceeds or providing other security.

Mr Justice Fraser set out five principles to be applied by the courts when considering applications for summary judgment from companies in liquidation (see paragraph 54), which he then helpfully distilled in addressing the elements to be satisfied where summary judgment would be available:

  1. The decision of the adjudicator would have to resolve (or take into account) all the different elements of the overall financial dispute between the parties [e.g. a final account]
  2. Mutual dealings on other contracts, or other defences, if they have not been taken into account by the adjudicator, will be taken into account be the court…
  3. There is no “real risk” that summary enforcement of the adjudicator’s decision would deprive the paying party of security for its cross-claim

Applying these principles to the facts, the Court’s focus was on the “real risk” noted at item 3 above.  In Mr Justice Fraser’s judgment, the “primary concern” was “whether there is a real risk that summary enforcement…would deprive the paying party of security for its cross-claim, to be recovery of the sum paid by way of satisfying the adjudicator’s decision”.

Mr Justice Fraser’s litmus test for adequate security was a “safeguard that seeks to place Erith in a similar position to the one which it would be in were JDC to be solvent”.

JDC purported to offer security in the form of an alleged letter of credit and an After the Event insurance policy (in respect of Erith’s costs), each procured by Henderson Jones.  Mr Justice Fraser held that such security was inadequate.  The alleged letter of credit did not represent proffering of security; it was instead simply an offer by Henderson Jones (i.e. and not the liquidator) to seek to obtain security.  In addition, the ATE policy was inadequate because it was not procured by the liquidators and also contained material exclusions and avoidance provisions.

Neither security, Fraser J found, would place Erith in a similar position to that which it would occupy if JDC were solvent.  Accotrdingly, Fraser J refused the claim for summary judgment.

The Judge also went on to note that in the event he was wrong about summary judgment, a stay of execution of the judgment was appropriate largely because the security offered was inadequate.

This judgment offers welcome clarification of how the Supreme Court’s decision in Bresco will apply in practice and appears to set a very high bar for companies in liquidation to overcome in order to obtain summary judgment of adjudicator’s decisions.

View by date:

View by author:

Would you like to hear more?