Adjudication is a process to resolve disputes, where parties to a construction contract have the right to refer their dispute to an independent adjudicator. The adjudicator’s decision is binding, unless the enforcement of the decision is successfully challenged in court. The following article summarises the legal landscape when it comes to the availability of adjudication in the context of insolvency set-off.
The judgment of the Supreme Court in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd  UKSC
Bresco had carried out electrical installation work for Lonsdale in 2014, but by 2016 had entered into insolvent liquidation. At this stage both parties claimed that they were owed money by the other. Bresco referred their claim to an adjudicator in 2018, which Lonsdale objected to on the basis that their cross-claim cancelled Bresco’s claim through insolvency set-off. This was accepted by the judge at first instance, which was subsequently appealed by Bresco, the action reached the Supreme Court.
In the Supreme Court, Lord Briggs found that the insolvency set-off did not mean that there was no longer a dispute under the construction contract. Equally, it was said to be clear that an insolvent party maintains a right to refer a dispute to adjudication, where it would be inappropriate for the court to interfere with the exercise of that right.
The Court of Appeal’s post-Bresco position in John Doyle
In the case of John Doyle Construction Ltd (In Liquidation) v Erith Contractors Ltd  EWCA Civ 1452, the Court of Appeal was tasked with reviewing the law post-Bresco in the context of challenging enforcement of an adjudicator’s decision.
This dispute arose from hard landscaping works at the Olympic Park in East London, that John Doyle Construction’s (JDC) carried out as sub-contractor to Erith. Shortly before completion of the works in 2012, JDC entered into administration. Adjudication was commenced in 2018 by JDC, where similar to Bresco both parties claimed they were owed money by the other. JDC were awarded £1.2 million and in 2020 JDC sought summary judgment to enforce the adjudicator’s decision.
At first instance, in refusing to grant summary judgment, Mr Justice Fraser held that the security offered by JDC in respect of the £1.2 million, together with the costs associated with seeking repayment of this sum (namely an ATE insurance policy) was inadequate. This was appealed by JDC. Lord Justice Coulson, in dismissing the appeal held that the judge at first instance was right to find both forms of security as wanting.
It was also accepted that a problem arising due to the adjudicators decision, while binding, is not final. Therefore the decision remains open to revisit the question of set-off. Accordingly, the insolvency regime cannot usually be reconciled with enforcing temporarily binding decisions.
The recent High Court ruling and reinforcement of Doyle in JA Ball
A recent decision before the Technology and Construction Court has put yet another nail in the coffin of those seeking to enforce an adjudicator’s decision in favour of an insolvent company, this time in the context of administration and not solely liquidation.
In the case JA Ball Ltd (in administration) v St Philips Homes (Courthaulds) Ltd (currently unreported), 3 February 2023 (TCC), it was argued that because the claimant company was only in administration that the adjudicator’s decision was capable of enforcement. On its’ facts, the judge found that the adjudicator had materially breached the rules of natural justice and so declined to enforce that decision, although he went on to consider, whether the claimant’s administration meant he would have granted judgment and, if so, ordered a stay of execution. He concluded that he would have enforced the decision, but stayed enforcement for 6 months to enable St Philips to bring its’ cross-claim.
The Court also provided some useful guidance regarding the limited circumstances in which insolvent companies will be permitted to enforce an adjudicator’s decision and the availability of ring-fencing as a form of security.
So where does this all leave the unpaid insolvent party?
Technically, insolvent companies can still adjudicate, but the risks of adjudicating while insolvent cannot be ignored. While a company in either liquidation or administration may be able to secure a decision from an adjudicator, and even though refusal of summary judgment is not always inevitable, a decision will be enforceable only in the most exceptional circumstances, including where:
- The decision concerns the final net position between the parties, and
- the insolvent party seeking enforcement is able to provide adequate security for the opposing party’s cross-claim and the costs of that cross-claim.