Adjudication in insolvency: any further questions?

Let me tell you about the recent case of John Doyle Construction Ltd vs Erith Construction Ltd, a groundworks dispute. But first a preamble.

The big advantage of 28-day adjudication is speed. Wallop, it’s all done – lightning fast. And it has worked better than any of us predicted when it started 20 years ago. That advantage of speed is its biggest hazard, though. A mistake when arguing or deciding the issues at pace is always on the cards. But the safety net is that the decision is only binding pro tem. It is open to a disappointed party to start afresh in litigation for a full-scale all-singing, all-dancing trial on the issues, while holding one’s nose on cost. A good outcome for the erstwhile aggrieved loser in the adjudication is to get an order for the previous winner to repay. Now comes the snag. What’s the score when the winner in the adjudication has got “your” money but it’s all gone … the outfit has gone bust? There is fat chance of getting the money returned.

The adjudicator in John Doyle vs Erith ordered the main contractor to pay (by that point insolvent) groundworks subcontractor John Doyle £1.2m, but Erith baulked. By then it could see that the Construction Act saying pay the subcontractor collided head on with the Companies Act, which would foresee the £1.2m going not to John Doyle but going to the liquidator. The liquidator would put the cash into the general pot of creditors all screaming for a share in the fragments of John Doyle’s carcass. Erith said that while the Construction Act allows a loser in adjudication to reverse his ill fortune and get his money back, the Companies Act sniffs and shrugs him off.

It is good law that an adjudication can go ahead to decide a dispute when one party is bust and that the adjudicator can order cash to be paid to a company in liquidation…

So, on the one hand it is good law that an adjudication can go ahead to decide a dispute when one party is bust and that the adjudicator can order cash to be paid to a company in liquidation. But on the other hand in truth there is little chance of the money being repaid later in liquidation, if the trial goes the other way. That’s why Erith wouldn’t pay up. And that’s why Doyle nevertheless came to court to enforce the adjudicator’s award, ordering Erith to stump up. It may even be that if Doyle had collected this £1.2m then it might have staved off liquidation. Come to think of it, being deprived of £1.2m could be the direct cause of a collapse; I don’t know.

The court in Erith vs Doyle had to decide whether to require Erith to pay the adjudicator’s order. The challenge was to find a method of ensuring that a later trial on the merits of their dispute would, or rather could, see the £1.2m safely back in Erith’s hands and not be “lost” to Doyle’s liquidator. Look first for some sort of security. Bear in mind that the security is a guarantee allowing that £1.2m to be paid to the adjudication winner, but this guarantee keeps the payer safe. So it is that the purchase of a bond, from such as an insurer or a bank, may release the cash. Another way is to obtain an undertaking from the liquidator.

I honestly think these ideas are a non-starter. The insurer or bank or liquidator is doing nothing more than taking a punt. It is taking a bet on whether the adjudicator got it right, such that a later piece of litigation would award damn near the same amount to the earlier winner. The other route is to order the disputed £1.2m to be paid into a stakeholder account by order of the court. The downside of that is that both are deprived of this heap of cash. It sits useless in the bank.

… but on the other hand, in truth there is little chance of the money being repaid later in liquidation, if the trial goes the other way

Instead we need some special provisions for an adjudication involving a company that is insolvent. It is only recently, in a case called Lonsdale vs Bresco that the Supreme Court overruled lower courts by announcing that it was lawful to carry out a construction adjudication with an insolvent company. And if that insolvent company successfully obtains an award for money, the default is the company gets the money – but only once there has been a fast-track trial in litigation. The party that lost and is aggrieved by the adjudicator’s award must immediately begin what I will call an abbreviated time-scale for a trial in the Technology and Construction Court (TCC).

Yes, it too is fast, but it starts from having all the information available in the adjudication plus the huge experience of the TCC High Court judges carrying out a forensic inquiry forthwith. I mean within weeks. This is not a summary judgment process, akin to enforcement. It is a trial, with witnesses, experts, counsel and solicitors; but at speed. It decides the dispute afresh but in reality decides whether to uphold the adjudicator’s award in favour of the company in liquidation, and decide whether it will have all of the money. The Supreme Court in Lonsdale vs Bresco gave a big hint that construction contract adjudication is to work even with an insolvent company.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple