October 20th 2020
John Doyle Construction Ltd v Erith Contractors Ltd  EWHC 2451 (TCC)
Many of you will already be aware the Supreme Court recently decided in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd that companies in liquidation now have the right to adjudicate a dispute.
In John Doyle Construction Ltd v Erith Contractors Ltd  EWHC 2451 (TCC), the Technology and Construction Court (TCC) has recently given further detailed guidance as to when enforcement of an adjudicator’s decision by a company in liquidation might be possible.
The case is illuminating for several reasons. It affirms that an adjudicator's decision in favour of an insolvent company will not always be enforceable; enforceability is left to judicial discretion. Five guiding principles are laid down in deciding whether to enforce an adjudicator's decision in favour of an insolvent company.
Some of these principles directly relate to the nature and quality of security offered by the insolvent company for costs under an insolvency litigation funding package from a third party litigation funder. The case also details some of the problems and pitfalls which may arise when an attempt to assign a cause of action appears to go wrong.
This case concerned a typical final account dispute. John Doyle Construction Ltd (Doyle), was employed to carry out landscaping work at the Olympic Park by Erith Contractors Limited (Erith). The works were completed prior to the 2012 Games, under an amended NEC3 contract. Doyle entered administration in June 2012 and then creditors’ voluntary liquidation in June 2013.
The dispute was adjudicated in June 2018. Doyle’s liquidators had been unable to agree the final account with Erith; this is unsurprising as is so often the case with insolvent construction companies. The liquidators then purported to assign the debt to Henderson & Jones Limited which specialises in purchasing claims from insolvent companies. The liquidators and Henderson & Jones Limited thereafter tried to enforce the adjudicator’s decision using the expedited summary judgment procedure in the TCC.
Key Principles Applied by the Court
- To be enforceable, the adjudicator's decision should consider all the different elements of the overall financial dispute between the parties. The dispute here concerned the Final Account, so the adjudicator's decision did reflect this principle. This is to avoid the tactical adjudication decisions on satellite issues coming before the courts for enforcement.
- The court should consider whether there are any dealings between the parties that are outside the terms of the construction contract. Such issues would of course be outside the jurisdiction of the adjudicator and would not be reflected in the adjudicator's decision. However they are relevant to the court in deciding whether that decision should be enforced.
- It was also relevant whether the defendant could rely on any defences which had not already been advanced in the adjudication.
- The court should consider whether the liquidator is prepared to offer security to the defendant to protect their value in any cross-claims. For example, if the liquidator were to offer to ring-fence the sum in question, the courts will be more likely to enforce the decision of the adjudicator. Such security would mitigate the risk identified in the final principle.
- There should not be a risk that enforcing the decision will deprive the losing party of security for any cross-claim.
In Meadowside Buildings Development Ltd (in liquidation) v 12-18 Hill Street Management Co Ltd  EWHC 2651 (TCC), it was previously considered that “security” may be provided by a liquidator through (a) undertakings by the liquidator, (b) a third party providing a guarantee or bond and (c) After The Event (ATE) insurance.
It was asserted there was a real risk Erith would be deprived of its right to have recourse to Doyle’s claim as security for Erith’s cross-claim if summary judgment was granted. Doyle relied upon a draft letter of credit from Henderson & Jones Limited’s bankers and an ATE insurance policy. However, the court found the arrangements organised by Henderson & Jones Limited to be inadequate in that:
- The purported letter of credit was in fact an intention to apply for a letter of credit in the future which did not provide a sufficient safeguard to Erith.
- Similarly, the ATE insurance was also considered inadequate due to the terms of the policy (such as restrictions which might allow the insurer to avoid cover).
The court stated in relation to the ATE policy:
“The ATE Policy in the instant case has a number of material exclusions and avoidance clauses which, in my judgment, support the criticisms made by Erith. Many of them are similar, if not identical, to the terms of the policy held to be insufficient in Premier Motorauctions. Further, it is in the name of Henderson Jones, and was not obtained or procured by the liquidators. It is Henderson Jones who have made the presentation of risk to the insurers, although both JDC and Henderson Jones are the insured. The restrictions are not solely in respect of fraud. They are numerous and varied. I find that the numerous features in this policy that are similar to the ones in the policy in Premier Motorauctions mean that the criticisms of Erith concerning this policy are well founded.”
Though not key to the court’s findings in this case, the following general observation was made about ATE:
“Mr Hussein also criticises the level of the premium payable, what he calls an “extraordinary sum of 20%” of recovery, capped at £400,000. The obvious observation is that with 55% of recovery going to Henderson Jones, and such a sizeable premium going to TM Legal, the lion’s share of payment would not be going to JDC and the liquidators. However, in view of my conclusions about the inadequacy of the letter of intent, and the terms of the ATE cover itself, it is not necessary to consider this as a separate head of challenge to the grant of summary judgment.”
Summary judgment was therefore refused.
In a judgment which also appeared to be highly critical of the role of Henderson & Jones Limited, it was also noted that:
- The liquidators and Henderson & Jones Limited entered a Deed of Assignment dated 8 December 2016. However, this assignment did not take effect as a legal assignment because the bespoke NEC3 terms and conditions that applied to the subcontract contained an express non-assignment clause. Erith refused to provide its consent to allow the assignment to take effect. The court remarked that the parties to the deed of assignment must not have read the NEC3 subcontract terms and conditions at the time of entering into the deed since they only became aware of the prohibition on assignment clause some time later.
- The Deed had envisaged that the assignment might not lead to an effective legal assignment and in those circumstances provided that the claims would be held on trust for Henderson & Jones Limited.
- The Deed also provided that the conduct and control of any Consequent Proceedings (including, but not limited to, decisions to commence, settle, discontinue, or abandon the Consequent Proceedings) will be at the absolute discretion of Henderson & Jones Limited. Neither the Company nor the Liquidators shall have any right to exercise any control over any Consequent Proceedings or be involved in the decision-making process.
- The Deed of Assignment was followed by a Deed of Agreement, entered into between the same parties and dated 13 December 2019. This agreement was said to have been entered into in order to avoid some criticisms of this type of arrangement (i.e. the earlier Deed of Assignment) which were articulated by Erith that the funding arrangements were potentially unenforceable as an abuse of process, contrary to the Damages Based Agreement Regulations 2013 and/or champertous.
This case highlights the inherent difficulties associated with the court’s attitude to the use of ATE by claimants and some third-party litigation funders. The courts will doubtless scrutinise policy wording which contains exclusion and avoidance clauses and may conclude that such policies are not sufficient protection from adverse costs for security for costs and/or adjudication enforcement purposes.
The court stopped short of a wider consideration of the funding arrangements entered into by Henderson & Jones Limited since other than determining that the ATE policy was inadequate for the purposes it was offered, it was not necessary to do so. However, a judgment which starts at paragraph 18 with the heading 'The Role of Henderson & Jones' and continues for another 12 paragraphs venturing into territory such as potential breach of Damages Based Agreement Regulations 2013 and/or champerty against a backdrop of litigation funding (having being embraced by the English Courts over the last 20 years or so) is also concerning.
The court also noted that the cost of ATE is very significant and when combined with a litigation funder, the dilution of returns to the insolvent estate is significant.
A key message therefore stands out. The courts will likely favour very transparent arrangements. Manolete believe it offers a very simple and clear structure. Our funding agreement and assignment document provides a full and complete indemnity to Insolvency Practitioners and to the estate. We do not back up the risk with expensive ATE which dilutes returns to creditors; the risk is held on our own balance sheet as a publicly listed company with a strong capital base. There is no complex paperwork for judges to scrutinise. Manolete documentation is around six pages long and plain for all to see that we always stand by the risks we take on at the outset. We believe this approach will defeat any applications for security for costs and no such application has been made on any Manolete financed case.
Attention is also drawn to the need to carefully consider whether a claim is capable of assignment. The 11 strong in-house legal team at Manolete will always review the assignment and funding options with the office holder and his legal advisors so the appropriate agreement is entered into, thereby ensuring the litigation focuses on the claim and not the finance arrangements.
Associate Director for the North-East