Clare Mendelle and Sarah Wertheim take a look at guidance provided by the Court of Appeal regarding security arrangements for insolvent claimants in the post-Bresco landscape.
The Court of Appeal has provided useful guidance regarding appropriate security arrangements for insolvent claimants in adjudication enforcement proceedings, by upholding the judgment in the recent case of John Doyle Ltd (In Liquidation) v Erith Contractors Ltd.
The previous case concerning adjudications involving insolvent parties was Bresco,where it was held that an insolvent company has a statutory right to pursue adjudication, and that it was a matter for the judge at the summary judgment stage to determine whether the adjudicator’s decision should be enforced.
In John Doyle, the first case after Bresco, the judge in the TCC set out the principles for the courts to apply when considering whether an insolvent claimant is entitled to summary judgment. The effect of those principles is that summary judgment will only be available to an insolvent party if certain elements are present – for example, if the adjudicator’s decision took account of all the different elements of the overall financial dispute between the parties.
In addition, it was held that adequate security must be offered in relation to any cross-claims the defendant might have. This is because the primary concern at the summary judgment application is the potential recovery of the sums paid to satisfy the adjudication decision.
In light of the principles and the requirement for security, the judge considered whether, on the facts of the case, John Doyle was entitled to summary judgment. He found that although John Doyle satisfied the principles, it failed on the provision of security point for several reasons which, when taken together, meant the security offered was inadequate to reassure the defendant that it would be able to repay the sum awarded if the adjudicator’s decision was overturned. In other words, the security offered did not put the defendant in the position it would be in if John Doyle were solvent. Accordingly, summary judgment was refused.
John Doyle appealed on the grounds that the judge did not consider the secondary and tertiary forms of security offered during the hearing. However, the Court of Appeal upheld the judgment, finding that any undertakings or security offered must be “clear, evidenced and unequivocal” and that the burden of demonstrating these requirements fell on the insolvent claimant, who in this case had not fulfilled these requirements.
So, what lessons can parties take from this case? Employers should be aware that this judgment does not affect an insolvent company’s right to commence an adjudication. However, Employers should note that this case creates a high bar for insolvent claimants to reach. This is because the principles must be met, and all security arrangements must be crystal clear (so they can be easily understood by the court) and in place in good time (certainly before any court appearance). A fundamental consideration for the court will be “what is being offered, by whom, and on what terms?” and an insolvent company must be able to satisfactorily answer these questions. If an insolvent company is not able to do so then they will find it difficult to obtain summary judgment enforcing the adjudicator’s decision.
However, this is not the only important lesson for parties to come out of this case. There was additional discussion (which did not form part of the reasoning for the decision) which addressed the tension between adjudication under the Construction Act and the Insolvency Rules. The judges in the Court of Appeal asked the question: is an insolvent company ever entitled to summary judgment to enforce an adjudicator’s decision? It was decided that, because an adjudicator’s decision is provisional, it cannot determine the “net balance” between the parties even when it includes all relevant claims and cross-claims. Further, if summary judgment is granted, that the default position will be a stay of execution owing to the uncertain financial position of the claimant. As such, while summary judgment may in certain circumstances be granted to an insolvent claimant, the value of such judgment is questionable if it is only going to be stayed.
  EWHC 2451 (TCC).
 Bresco v Michael J Lonsdale  UKSC 25
  EWCA Civ 1452
Clare Mendelle is a Professional Support Lawyer and Sarah Wertheim is a Trainee Solicitor at Sharpe Pritchard LLP.
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