The case of John Doyle Construction Ltd v Erith Contractors Ltd  EWCA Civ 1452 (07 October 2021) saw the Court of Appeal re-examine the conflict between the adjudication process and the insolvency following the Supreme Court’s decision of Bresco Electrical Services Ltd v Michael J Lonsdale Ltd.
Last October, we followed the case of John Doyle Construction Limited v Erith Contractors Ltd here, the High Court refusing to enforce the arbitrator’s decision due to the plaintiff’s inadequate guarantee offer for the respondent’s counterclaims and the costs of bringing such a claim. The decision came just four months after the Supreme Court of Bresco Electrical Services Ltd (“Bresco”) v Michael J Lonsdale (Electrical) Ltd, which ruled that insolvent construction companies have jurisdiction to submit a dispute to arbitration. For a summary of the Bresco cases, please see our previous article here.
On October 7, 2021, the Court of Appeal dismissed the appeal of John Doyle Constriction (“JDC”) Ltd, while taking the opportunity to clarify the burden on a plaintiff company in liquidation when it seeks to enforce an arbitrator’s decision.
JDC appealed the October 2020 High Court ruling on the following grounds:
- The judge disregarded JDC’s alternative offer of guarantee to its liquidators to pay the judgment sum by Erith Contractors Limited (“EC”) into an escrow account or in court.
- The judge erroneously concluded that the act of indemnification would not be initiated until the start of the litigation by JDC, making it insufficient security for EC’s costs in any action that EC might bring to seek reimbursement .
- The judge erred in law in ruling that insolvency rule 6.42 did not provide adequate security for EC.
Before addressing the above reasons, the Court recognized that the procedure for requesting interim relief was not established with the intention that it be continued by a company in liquidation. The Court emphasized that a corporate plaintiff in liquidation must strive to clearly describe the issues in dispute to ensure an effective hearing, as the process is inadequate to the complexities that arise from unclear cases.
JDC did not provide “clear, proven and unequivocal” undertakings or guarantees when required, and did not provide unnecessarily detailed witness statements as evidence. The court attributed these failures to JDC’s liquidators, who took an “unnecessarily aggressive enforcement approach” in their attempt to recover and use the money, instead of focusing on isolating the money or to provide adequate security to EC.
The judgment of the Court of Appeal
Regarding the first ground, the Court of Appeal concluded that the liquidators had not presented in a clear and unequivocal manner the offer that the respondent should pay the sum identified in the decision into an escrow account or to the court to serve warranty required for all EC-excluding and counterclaim. The Court rejected the appellant’s argument that the judge had not considered this as an alternative at first instance, because this “offer” would have contradicted the existing agreement between the appellant and their liquidators that the sums paid by the Respondent would be paid to liquidators and therefore could not have been presented as a viable option.
In order for the second ground to succeed, the Court said that JDC would have to present a declaration from an insurer that it would be prepared to offer EC an indemnity document in this particular case as security for any order for costs. of EC that could be done as part of a proceeding in which they requested payment of JDC. Although the court agreed that it was not for JDC to make these arrangements, evidence of such an act of indemnification provided by an insurer was considered by the court to be an absolute minimum requirement.
The appellant invoked insolvency rule 6.42 for the third ground, which provides as follows:
- Rule 6.42 (1): All fees, charges and charges and other expenses incurred during the liquidation shall be treated as the expenses of the liquidation.
However, rule 6.42 (4) (a) gives priority to the expenses incurred by the liquidator in court proceedings over the costs and expenses of the liquidation. Therefore, if EC were to initiate reimbursement proceedings and obtain costs orders against the liquidator in those proceedings, those costs orders would have no priority. Therefore, the Court rejected ground 3 on the grounds that rule 6.42 did not apply.
The right of a company in liquidation to pronounce judgment
The Court of Appeal directly applied Lord Briggs’ observations in the Bresco judgment that a summary judgment to enforce an arbitrator’s decision will often be unavailable when the plaintiff is in liquidation, but it would also be refused when it deprived the defendant of his right to resort to the insolvent company’s claim as security for its cross claim.
Lord Briggs further submitted in Bresco that where the counterclaim can be determined by the arbitrator, then summary execution would not be inappropriate because the demand and the counterclaim are part of the same dispute under the contract. However, the Court of Appeal disagreed with this position on the grounds that it failed to take into account the fact that an arbitrator’s decision was provisional and therefore could not be considered the final determination. of a net balance. The Court of Appeal concluded that an arbitrator’s provisional finding cannot be regarded as a final determination of the net balance when the other party maintains its set-off and counterclaim, because the insolvency set-off must take place. apply to auction. Therefore, the Court of Appeal concluded that JDC would not have been entitled to summary judgment anyway if any of the grounds of appeal had been successful.
One year after the decision to Bresco, this call clarified a few points regarding insolvency and adjudication.
First, a company claimant in liquidation must ensure that it takes the necessary steps to make an efficient hearing, which clearly presents its areas of dispute. Companies in liquidation should be prepared for the court to rule against the plaintiff if they fail to demonstrate to the court a focused and well-structured approach to the summary judgment request with viable alternatives.
Second, businesses should remember that while this case has reaffirmed that insolvent businesses can initiate legal proceedings for litigation, it also reiterates that enforcement is only possible in limited circumstances, as courts cannot exercise their jurisdiction. discretion not to apply insolvency rules. The arbitrator’s award must represent a final account of the transactions between the parties and, also, the insolvent party must be able to provide adequate security for the costs. However, the provisional conclusion of the arbitrator cannot be regarded as a final determination of the net balance when the opposing party maintains a request for set-off and renewal.