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Construction Disputes: enforcing adjudicator’s awards in favour of insolvent referring party – what does constitute adequate security?

By Nicholas Ellor, Senior Underwriter

This article was first published in the August 2021 issue of the Law Society’s ‘Litigation Funding’ magazine

Estimated reading time: 6 minutes, 47 seconds

Now that we have the benefit of the unanimous decision of the Supreme Court in Bresco Electrical Services Ltd v Michael J Lonsdale [2020] UKSC 25 (judgment given on 17.06.202), it is firmly established that (1) there is no jurisdictional bar to an insolvent contracting party exercising its statutory and contractual right to refer a dispute to adjudication (2) there is no incompatibility between the insolvency and adjudication regimes (3) adjudication is not an “exercise in futility” whether or not a cross claim exists and any objections to an application to enforce an adjudicator’s award can be aired and dealt with at the summary judgment stage.

It is worth noting that although an adjudicator’s decision is “temporary” and not final or binding, the reality is, a very small percentage of adjudicator’s decisions in construction disputes are appealed. Unless there has been an obvious error or miscarriage of justice, the adjudicator’s decision will in all probability be accepted and considered as a decent and fair effort at establishing a final account and who owes what to whom.

What are the likely objections to enforcing an adjudicator’s award, or to put it another way in what circumstances would a court consider it just to grant enforcement of an adjudicator’s award?

The most obvious one is that the party seeking to enforce the adjudicator’s award is insolvent and the responding party either has a cross claim and or seeks to overturn the adjudicator’s decision. In this scenario (on the basis it is successful) it clearly would not want to prove in the insolvent estate as an unsecured creditor along with other unsecured creditors and receive only a few pence in the pound on a pari passu distribution. It would also not want to be in a position where it has no realistic chance of recovering its costs from the insolvent applicant incurred in defending the summary judgment application itself and in proceedings to overturn the adjudicator’s decision should it chose to issue them (in respect of the latter it would also be a claimant and not therefore be able to seek security for its costs).

The defendant would in effect want any adjudicator’s award to be security for its cross claim. This can be dealt with by a ring-fencing letter, whereby the liquidator agrees and undertakes to the court  to hold the sum awarded in a separate account pending issue of proceedings in respect of any alleged cross claim and to overturn the adjudicator’s decision, both within a specified time limit of the date summary judgment is given.

In respect of costs exposure, an after-the-event insurance policy is the most obvious solution.

The above issues were directly addressed by Mr Adam Constable QC Meadowside v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651. This was of course before the Supreme Court decision in Bresco, but I note Lord Briggs does not counter what Mr Adam Constable QC stated in this regard.

In summary, Mr Adam Constable QC considered that enforcement of an adjudicator’s award would be appropriate if:

  • a “final net position” has been established between the parties (ideally the adjudication has dealt with the entirety of the mutual dealings between the parties);
  • security in respect of the sum to be enforced (e.g. the “ring-fencing” undertaking to the court to ringfence the sum enforced for a specified duration);
  • security for adverse costs orders in respect of (a) the summary judgment application and (b) proceedings to overturn the adjudicator’s decision.

As Mr. Adam Constable QC stated in paragraph 87(3) of his judgment:

“What is satisfactory as security in form, duration and amount is a question on the facts in the ordinary way and may be provided incrementally (as it would be, for example, in any security for costs application).”

He went on to say that ATE insurance would be an option to deal with the adverse cost order risks.

Much will depend on the specific wording of the insurance policy and its adequacy.

The application of Bresco post Supreme Court decision

In the case of Styles & Wood Ltd v GE CIF Trustees [2020] EWHC 2694 (TCC) which was heard 04.09.2020 following the Supreme Court’s decision on Bresco, the applicant was seeking to enforce an adjudicator’s award. A ringfencing undertaking was offered and After the Event insurance policy was taken out with Temple Legal Protection Limited with an aggregate level of indemnity of £260,000 apportioned between the adverse costs risks of the summary judgment proceedings and proceedings to overturn the adjudicator’s decision.

Ultimately the judge found the level of indemnity as it related to possible proceedings to overturn the adjudicator’s decision to be sufficient and to provide adequate protection for the defendant. This was after an analysis by the judge of the defendant’s position regarding its projected costs of overturning the adjudicator’s decision. Recourse was always open to the defendant to come back to the court seeking an increase in the level of indemnity should existing cover be deemed inadequate.

As HHJ Parfitt observed in paragraph 12 of his judgment:

“… any judge looking at questions of security in any particular case, and most importantly the level of security, is always going to be sensitive to the particular facts and evidence before him when deciding what is appropriate.”

Clearly the wording of any policy of insurance and the level of cover provided are key elements for consideration by a judge in determining whether or not such cover constitutes adequate security.

Mr Justice Fraser in John Doyle Construction Limited (in liquidation) v Erith Contractors [2020] 2451 (TCC) in his judgment dated 14.09.202 laid out his criteria for determining whether or not to grant an application for summary judgment to enforce an adjudicator’s decision in favour of a company in liquidation.

  • Does the adjudicator’s decision deal with the entirety of the mutual dealings between the parties?
  • Are there any “mutual dealings” between the parties that fall outside the contractual dispute the adjudicator decided on?
  • Does the defendant have defences not pleaded in the adjudication?
  • Is the liquidator prepared to offer appropriate undertakings?
  • Will summary judgment if granted deprive the defendant of security for its cross-claim?

In his judgment, Fraser J considered the adequacy of the After- The -Event insurance policy the claimant had taken out to provide security for the defendant’s costs.  The policy wording was considered in detail, in particular the “exclusions” under which cover could be avoided or excluded.

In his view there was a real prospect of some of the exclusions, enabling the insure to deny cover, occurring. In addition, the policy of insurance was issued in the name of the funder and not the liquidator of the claimant company.

In the circumstances Fraser J did not consider the ATE insurance policy sufficient to protect the defendant’s position and effectively put it in the same position it would have been in had the claimant been solvent.

Consensus as to adequate security

The prevailing view appears to be that security to be offered to safeguard the defendant’s position when an insolvent claimant seeks to enforce an adjudicator’s award, should comprise (1) a ringfencing undertaking to the court by the liquidator not to distribute the monies paid for a specified period of time to allow the paying party the opportunity to appeal and or commence proceedings to overturn the adjudicator’s decision and (2) an After The Event Insurance policy in the name of the liquidator to provide cover for the paying party in respect of adverse costs of (a) the application for summary judgment and (b) proceedings to overturn the adjudicator’s award.

A word of caution, the policy wording of the ATE insurance contract will be the subject of detailed scrutiny both by the defendant’s legal advisers and by the presiding judge.

Prospective insureds and their legal advisers as well as the insurers will be alert to the fact that exclusions normally and routinely included in an ATE policy of insurance which would allow the insurer in certain specified circumstances to avoid cover, may not be appropriate nor suitable when considered by a judge in determining whether or not it provides the defendant adequate security.

If you would like more information on our commercial litigation insurance and disbursement funding products, or you have any other legal expenses insurance questions, please get in touch via email to nicholas.ellor@temple-legal.co.uk or call 01483 514815. I look forward to hearing from you.

Nicholas Ellor

Senior Underwriter
Read articles by Nicholas Ellor

Nicholas Ellor

Nicholas is a Senior Underwriter within the commercial underwriting team.

Prior to joining Temple, Nicholas had over twenty years’ experience working as a solicitor in London on both contentious and non-contentious company commercial and corporate matters. Having been a practitioner, he is fully aware of the pressure and time constraints a commercial litigator has to operate under and brings that expertise insights to the table and provides a fast, highly professional service.

His experience and knowledge enhance our teams’ abilities to quickly and expertly assess claims and to provide intelligent and timely support throughout the legal process.

 

 

Read articles by Nicholas Ellor