John Doyle v Erith - The Latest Instalment in Insolvency vs Adjudication

Background

Erith employed John Doyle as subcontractor to carry out hard landscaping works at the Olympic Park in 2012. Following John Doyle's insolvency, Erith completed the works and claimed that it had overpaid John Doyle by approximately £3m. John Doyle had its own claim for a final account of £4m. John Doyle sold its claim to litigation funder Henderson & Jones Limited. 

John Doyle was awarded approximately £1.2m by an adjudicator and sought enforcement by way of summary judgment. The Technology and Construction Court (TCC) refused to grant summary judgment on the basis that John Doyle had offered inadequate security in relation to any cross-claims. 

Court of Appeal decision

John Doyle appealed and the Court of Appeal rejected the appeal on the following grounds:

The existence of a cross claim

The Insolvency Rules provide that where a company goes into liquidation, before it is wound up, an account must be taken of what is due from the company and any creditors to each other in respect of their mutual dealings and the sum due from one must be set off against the sum due from the other. 

The Court of Appeal held that as Erith maintained a set-off and cross-claim, according to the Insolvency Rules, there could be no entitlement to summary judgment. In doing so, the Court of Appeal stated that the provisional nature of an adjudicator's decision, even one concerning a final account dispute where no other significant claims arise (whether contractual or non-contractual), meant that it could not be treated as if it were a final determination of the net balance if the other party maintained that it had a cross-claim. 

Accordingly, where the other party has a cross-claim, it will not be possible for an insolvent party to obtain summary judgment to enforce an adjudicator's decision. 

Lack of adequate security

The Court of Appeal said that "building blocks" of any security had to be in place before it can be assessed by the offeree, these being: for what? by whom? on what terms?

The Court of Appeal looked at three types of security which John Doyle alleged to have offered:

• ATE Policy: Fraser J at first instance had determined that as the policy would only have protected against an adverse costs order in Erith's favour, and as it contained exclusion and limitation clauses, the sums in question would not have been adequately ringfenced. This part of his judgment was not appealed by John Doyle.
• Deed of Indemnity: The Court of Appeal found the structure of the Deed of Indemnity proposed was inadequate as it did not offer security for any orders for Erith's costs that could be made in subsequent proceedings brought against John Doyle.
• Payment into Escrow or the Court: The Court of Appeal noted that payment into Court or into Escrow was of no immediate benefit to either party as it leaves money to sit "uselessly" in an account which cannot be distributed by the liquidators of the insolvent party. The Court did not go so far as to say whether payment into Court or Escrow would be adequate security, but did note that if it were, it should be regarded as very much a last resort.

The current position

1. The Court of Appeal's decision demonstrates the barriers an insolvent party will face in enforcing an adjudication where the respondent has any potential cross-claims.
2. The Court did not say what security would be deemed adequate, albeit its comments show this is a high threshold. At the very least:
   • The terms of any security must be clear and unequivocal, and should be free of exemptions.
   • Any security offered should protect the respondent against costs orders in its favour in proceedings against the insolvent party, not just the insolvent party in a claim brought against the respondent.
   • The Court of Appeal distinguished between security offered by the liquidators of the insolvent party and by litigation funders but made no comment on the extent to which security offered by a litigation funder will or will not be considered adequate. Where a litigation funder offers security instead of the liquidators themselves, it will be necessary for the Court to consider the terms between the liquidators and funder.
3. The Court was aware that the consequence of its decision is that defendants such as Erith can take advantage of the claimant's insolvency to avoid paying. Coulson LJ did note, however, that the defendant can commence proceedings and that "robust case management would lead to an efficient resolution of the remaining areas of dispute." However, the advantage of adjudication is its speed and low costs and many claims that may be suitable for adjudication would not be pursued if it was necessary to go to court.
4. In Bresco v Lonsdale, Lord Briggs also spoke to the usefulness of adjudication as a weapon for insolvent parties irrespective of whether the subsequent decision is capable of summary enforcement. This will depend on the circumstances but in many cases is unlikely to be sufficient incentive if there is no money available at the end of the process.

Authors: Marco D'Onghia and Tom Duncan

Cases referred to:

John Doyle Construction Limited (in liquidation) v Erith Contractors Limited [2021] EWCA Civ 1452

Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25