Construction Adjudication Part 6 of 2020

Construction Adjudication Part 6 of 2020

The Enforcement of Adjudicators’ Awards under the HousingGrants, Construction and Regeneration Act Adjudication Cases

1996: Part 6 of 2020 Kenneth T. Salmon Consultant Solicitor at Slater Heelis LLP

Construction&Engineering

Contents

Page 3

1.. . .Introduction .........................................................................................................................................

Page 4

2. Insolvency set-off enforcement and stay.......................................................................... John Doyle Construction Limited (in Liquidation) v Erith Contractors Limited [2020] EWHC 2451 (TCC) judgment 14 September 2020 Fraser J 3. Jurisdiction – request for appointment preceding notice of adjudication........... Lane End Developments Construction Ltd v Kingstone Civil Engineering Ltd [2020] EWHC 2338 (TCC) judgment 28 August 2020 HHJ Halliwell 4. Adequacy of ring-fencing and security for costs: Insolvency – Administration - Enforcement ......................................................................................................................................... Styles & Wood (in Administration) v GE CIF Trustees

Page 10

Page 13

Introduction The Enforcement of Adjudicators’ Awards under the Housing Grants, Construction and Regeneration Act 1996: Part 6 of 2020. Kenneth T. Salmon, Consultant Solicitor, Slater Heelis LLP. In this part we consider at some length the first reported attempt at enforcement of an adjudication award by an insolvent company since the Supreme Court judgment in Bresco. In addition, we feature a case where a failure to follow the sequence of steps in the Scheme resulted in an adjudicator being deprived of jurisdiction, and where the court found that the defect could not be waived. We also review the application of the Meadowside principles to a case involving a company in Administration where the issue was the adequacy of the ATE insurance.

Legislation The Act means the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 Pt 8.

The ‘new’ provisions apply to contracts entered into on or after 1 October 2011.

The main regulations are contained in the Scheme for Construction Contracts (England & Wales) Regulations 1998 (the ‘Principal Regulations’).[1] They have been amended by the Scheme for Construction Contracts (England & Wales) (Amendment) (England) Regulations 2011[2] (the ‘new Regulations’). The new Regulations apply only to contracts for construction operations in England entered into on or after 1 October 2011. For earlier contracts the Principal Regulations apply. There are separate regulations for contracts for work in Scotland applicable to contracts made on or after 1 November 2011.[3] The new Regulations apply only to contracts for work in Scotland entered into on or after this date. For earlier contracts the Scheme for Construction Contracts (Scotland) Regulations 1998[4] applies. There are new separate regulations for Wales, applicable to contracts for construction operations in Wales entered into on or after 1 October 2011.[5] A reference to “the Scheme” is to the Principal Regulations for England and Wales, or the Scheme for Scotland, as the context so requires.

[1] Scheme for Construction Contracts (England & Wales) Regulations 1998 (SI 1998/649). [2] Scheme for Construction Contracts (England & Wales) (Amendment) (England) Regulations 2011 (SI 2011/2333). [3] Scheme for Construction Contracts (Scotland) Amendment Regulations 2011 (SI 2011/371). [4] Scheme for Construction Contracts (Scotland) Regulations 1998 (SI 1998/687) (S.34). [5] Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (Wales) Regulations 2011 (SI2011/1715) (W.194).

1) Insolvency set-off enforcement and stay: John Doyle Construction Limited (in Liquidation) v Erith Contractors Limited [2020] EWHC 2451 (TCC) judgment 14 September 2020 Fraser J

Background and chronology

The parties had entered into a construction contract based on a bespoke form of NEC3 contract under which the claimant John Doyle Construction (JDC) was engaged as a subcontractor to Erith Construction Limited (Erith) for landscaping works at the London Olympic Park for the games in 2012. JDC entered administration on 21 June 2012; and then entered creditors voluntary liquidation on 13 June 2013. JDC commenced the adjudication, leading to the decision the subject matter of these proceedings, on 22 January 2018. The claimwas for approximately £4 million, and the adjudicator awarded JDC the sum of £1.2 million approximately, including VAT and interest. In 2020 JDC commenced proceedings in court under part 7 CPR for summary judgment to enforce the decision in its favour. Erith opposed the application and if necessary sought a stay of execution of any judgment granted. The hearing of the contested summary judgment application by JDC was postponed from 17 June 2020 until 2 July 2020 so that the parties and the court could take account of the Supreme Court's decision in Bresco . In that case, Lord Briggs stated that companies in liquidation had the right to adjudicate disputes, and also that the problems caused by liquidation identified by the Court of Appeal both in an earlier case[7], and in the court of appeal in Bresco [8] itself, could all be considered at the enforcement stage. Thus it was that the court found itself faced with distilling or applying the principles that govern a party in liquidation applying to enforce an adjudicator’s decision in its favour.

Comment

This is the first attempt at enforcement of an adjudicator’s decision by an insolvent company since the Supreme Court handed down its judgment in Bresco [6]. In a carefully crafted and lengthy judgment, Fraser J had the task of discerning the rationale of the Supreme Court judgment, distilling the principles and applying them to the convoluted facts of the case. A large part of his judgment was necessarily devoted to the question of the adequacy of the security offered by the claimant for the claim and future costs, which question proved to be determinative of the outcome. The interest to liquidators and practitioners lies in the way the court interpreted and applied Lord Briggs’ judgment, and reconciled it with other relevant cases, in deciding whether or not to grant summary judgment and if so, whether to order a stay of execution.

[6] Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (in liquidation) [2020] UKSC 25 [7] Bouygues (UK) Ltd v Dahl Jensen (UK) Ltd [2000] EWCA Civ 507 [8] [2019] EWCA Civ 27

1. The Deed 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. 2. Henderson Jones paid JDC £6,500 for the assigned claims, with further payment to JDC dependent upon outcome; 3. Henderson Jones had conduct and control of any proceedings pursued in relation to the assigned claims;

The delay in starting enforcement from 2018 to 2020 was explained by the developing law resulting in the decision in Bresco . The five and a half year delay from mid-2012 to 2018 was caused by quite different matters relating to the involvement of a company called Henderson Jones Ltd (see next).

Henderson Jones

In 2016 along came the company called Henderson Jones (H&J) whose business was to "… purchase[s] litigation and arbitration claims for immediate money and/or a share of the proceeds." In this case, that was not what was done. Instead H&J took an assignment of the claim against Erith. However, this assignment did not take effect as a legal assignment because the bespoke NEC3 terms applicable to the subcontract contained an express non-assignment clause on top of which Erith refused its consent. Erith now went further and said it was H&J who brought the proceedings, having acquired rights to the dispute from the liquidator of JDC. Erith also pointed to the fact that the bulk of the spoils of any judgment in JDC's favour would go to H&J as one of the reasons why summary judgment should not be granted. The Deed of Assignment was followed by a Deed of Agreement, entered into between the Liquidator of JDC and H&J dated 13 December 2019. After reviewing the deed the court concluded the following pertinent points:

4 . Recovery of any claims were to be paid to Henderson Jones;

5. 45% of net recovery in those subsequent proceedings (meaning recovery less costs) were to be paid out to JDC by Henderson Jones;

6. Henderson Jones would therefore retain 55% of the net recovery.

Whether or not the deed was intended to avoid some of the criticisms of this type of arrangement the court noted that such criticisms were raised by Erith following the adjudication (and in the court proceedings) and could have been predicted, due to the judgment handed down in October 2019 in Meadowside[9] where such arrangements were held to be contrary to the 2013 Regulations[10] pertaining to damages based agreements and also champertous.

[9] Meadowside Buildings Development Ltd (in liquidation) v 12-18 Hill Street Management Co Ltd [2019] EWHC 2651 [10] Damages Based Agreements Regulations 2013

Routes to enforcement

Issue 1. In what circumstances will a company in liquidation be entitled to summary judgment on a valid adjudicator's decision in its favour? After considering the Supreme Court judgment in Bresco, and the court of appeal judgments in Bouygues , and in Bresco itself, Fraser J. set out five principles to be applied when considering whether a company in liquidation would be entitled to summary judgment on a valid adjudicator’s decision in its favour. “ 1. Whether the dispute in respect of which the adjudicator has issued a decision is one in respect of the whole of the parties' financial dealings under the construction contract in question, or simply one element of it. 2. Whether there are mutual dealings between the parties that are outside the construction contract under which the adjudicator has resolved the particular dispute. 3. Whether there are other defences available to the defendant that were not deployed in the adjudication. 4. Whether the liquidator is prepared to offer appropriate undertakings, such as ring-fencing the enforcement proceeds, and/or where there is other security available. 5. Whether there is a real risk that the summary enforcement of an adjudication decision will deprive the paying party of security for its cross-claim.”

Two different routes to potential enforcement had to be considered on the application. First, whether a company in liquidation such as JDC was entitled to summary judgment at all. Second is if it was, whether a stay of execution should be granted. The two routes might lead to the same outcome and would require consideration of some if not all of the same matters. The question of a stay would only arise if JDC succeeded in obtaining summary judgment. The main point was to identify the principles that should be applied by the court when considering an application for summary judgment, given Lord Briggs' dicta in Bresco , and his approval of Chadwick LJ in Bouygues . The first matter to consider is whether the adjudicator’s decision was a valid one, that is to say, made within his/her jurisdiction and without any material breach of the rules of natural justice. Only if any such challenges were resolved in the referring party’s favour, and the decision was found to be valid would it be necessary to go to consider the issues that followed.

The issues for the court

There were three issues to be resolved:

1. In what circumstances will a company in liquidation be entitled to summary judgment on a valid adjudicator's decision in its favour?

2. Were those circumstances present here, such that JDC was entitled to summary judgment?

3. If so, should the court order a stay of execution, as was done in Bouygues v Dahl Jensen , in light of the Supreme Court decision in Bresco and applying the principles in Wimbledon Construction Company 2000 Ltd v Derek Vago [11].

[11] [2005] EWHC 1086 (TCC)

This might have practical consequences for adjudicators, who found themselves asked by responding parties to become embroiled in matters outside the construction contract. Orthodoxy suggested that they ought to resist becoming involved in that way. They were appointed to resolve the dispute under the construction contract. Absent specific agreement from the parties for the adjudicator to consider and resolve matters outside the construction contract, they would have no jurisdiction to do so. Such matters would be for the court to consider on the summary judgment application.

In elaborating on the above principles, the judge made these further points.

1. The decision of the adjudicator would have had to resolve (or take into account) all the different elements of the overall financial dispute between the parties to the construction contract. Where, as in this case, the dispute referred was the valuation of the referring party's final account, summary judgment would potentially be available (dependent upon the other considerations below) . If the dispute referred was a more narrowly defined one, such as the valuation of a single component part of an interim payment, or one single head of claim, then summary judgment would not be available. It was suggested by the court that the type of situation where the overall financial dispute was referred, was ‘unusual’ or ‘atypical’ and contrasted it with the more common technical or ‘smash and grab’ adjudication which would not be suitable for enforcement by an insolvent referring party. 2. Mutual dealings on other contracts, or other defences, if they have not been taken into account by the adjudicator, would have to be taken into account by the court on the summary judgment application. That conclusion was to be drawn from what Lord Briggs said at [65], where he stated: "there may be no dispute about the cross- claim, and the claimmay be found to exist in a larger amount, so that there is no reason not to give summary judgment for the company for the balance in its favour."

3. Where there was no "real risk" that summary enforcement of the adjudicator's decision would deprive the paying party of security for its cross-claim.

Issue 2. Are those circumstances present here, such that JDC is entitled to summary judgment? Although some of the same considerations arose under both this and Issue 3, the court considered that the two issues had to be addressed sequentially. Lord Briggs at [67] in Bresco had expressly stated that where there is a real risk that the summary enforcement of an adjudication decision would deprive the paying party of its right to have recourse to that claim as security for its cross-claim, then the court would refuse summary judgment. Although addressing the point covered much of the same ground that would need to be addressed when deciding whether to order a stay of execution, the imposition of a stay only arose if a claimant succeeded in obtaining summary judgment. Erith claimed it was owed £40,000 by JDC on a contract called Tooley Street. It raised it as set off in the adjudication and the adjudicator dismissed the claim on evidential grounds. Therefore there was no need to consider it again on enforcement. Even if it was taken into account it was far less than the sum awarded and would not prevent judgment for the balance. The mere existence of a cross claim was not sufficient to defeat a claim to summary judgment. It would depend on the size of the cross claim and possibly its nature.

The court then moved to what was described as the real battleground on the application namely whether there was “a real risk” that the summary enforcement of the adjudication decision would deprive Erith as paying party of its right to have recourse to that claim as security for its cross-claim. JDC relied on (a) a letter of credit and (b) an ATE insurance policy as providing sufficient security for the amount of the adjudication award (although there was an issue over liability for the VAT element) and Erith’s potential costs of seeking to overturn the adjudication decision in subsequent proceedings.

Safeguards (Security)

After considering the case of Meadowside and the judgment of Lord Briggs in Bresco , Fraser J stated that the “primary concern” was whether the grant of summary judgment would deprive the paying party of security for its cross claim, in this case to the extent of the sum to be paid over to satisfy the adjudicator’s decision.

The costs of ‘winning its money back’ were a “secondary concern” .

At paragraph 84 of his judgment Fraser J. said: “Both of these concerns can, in theory at least, be met by appropriate safeguards. However, it is recovery of the sum that would actually be paid out to the company in liquidation, were summary judgment to be granted, that is of the most importance, in my judgment.” Referring again to Meadowside at [84] where it was stated: "as near as possible, the safeguards must seek to place the responding party in a similar position to if the company was solvent" Fraser J said he agreed with that, and adopted that approach. He described it as the obverse of Lord Briggs reference to "real risk".

The ATE policy The policy terms contained a number of cancellation provisions and thus the policy lacked the necessary certainty of payment.

Whatever safeguards were offered by the company in liquidation, they must seek to place the responding party in such a position. The ethos of adjudication was "pay now, argue later". The purpose of the "argue later" element of that phrase, (contained in section 108 of the 1996 Act), was that the "pay now" element could be ‘rewound’, if the court or arbitrator later decided the outcome of the dispute in the responding party's favour. The decision here rested on the actual nature and form and terms of the instruments of security proffered by JDC.

As the judge put it:

“ I do not consider the proposed arrangement to be sufficient, nor do I consider it comparable to undertakings from the liquidators which Lord Briggs plainly had in mind, nor do I consider it similar to ringfencing the proceeds.”

Therefore, the application for summary judgment failed.

Issue 3: If so, should the court order a stay of execution, as was done in Bouygues v Dahl Jensen, in light of the Supreme Court decision in Bresco and applying the principles in Wimbledon Construction Company 2000 Ltd v Derek Vago? Had summary judgment been granted, the court would have had to consider as a matter of discretion, whether or not to grant a stay under RSC Ord 47(1)(a). This rule had been considered on an application to stay the execution of summary judgment obtained on enforcement of an adjudicator's decision, in a number of cases particularly Wimbledon in which all of the different decisions up to that date were considered, and the principles summarised. That case has been used as the definitive statement for the principles to be considered for the last 15 years. In Wimbledon it was expressly stated that "if the claimant is in insolvent liquidation, then a stay of execution will usually be granted" unless there were some exceptional circumstances that would justify not ordering a stay of execution.

The letter of intent

JDC did not offer to ring fence the amount awarded and there was no undertaking from the liquidators to retain and repay it if ordered to do so. Instead H&J put forward what it called a letter of credit from its bankers. The court found it to be no more than a letter of intent to provide a letter of credit and then only after actual receipt of the monies awarded by the adjudicator. The court did not regard this as offering any protection.

The conclusions of the court on the inadequacy of the letter of intent from H&J's bankers, and the terms of the ATE cover, were the same, whether they were considered under the "real risk" test (above), or whether this was the "usual case" under [26](e) of Wimbledon criteria. Because JDC was in insolvent liquidation, there was nothing sufficiently exceptional to displace the usual order of the court to grant a stay of execution.

2) Jurisdiction – request for appointment preceding notice of adjudication: Lane End Developments Construction Ltd v Kingstone Civil Engineering Ltd [2020] EWHC 2338[12]

Background

Lane End was engaged by Kingstone to provide supervision, labour and materials for site works, under a sub contract containing no provision for adjudication, in the absence of which the adjudication provisions of part 1 of the Scheme were incorporated as implied terms. Lane End made an application for interim payment no. 17 for £356,439.19. Kingstone served no pay less notice and its payment notice was given late. On 20 March 2020, at 07:46 Lane End made a request by email to the RISC to appoint an adjudicator. Later that same morning a meeting took place at Kingstone’s office to try and resolve the question of entitlement. At the meeting, Lane End informed Kingstone they had commenced two sets of adjudication proceedings and later in the meeting around 11 am provided Kingstone with what was “apt to be” an adjudication notice. A representative of Lane End made a secret sound recording of the meeting at which it was alleged by them that Kingstone had acknowledged the fact that proceedings had been commenced.

Had summary judgment been granted, the court would have ordered a stay of execution.

Procedural observations The court observed that the streamlined and rapid procedure developed by the TCC for adjudication business was developed to match the ethos and intention of adjudication, to give parties to construction contracts quick answers to disputes, often during construction projects themselves. That procedure was not required, or even suitable, for summary judgment applications such as the one in this case where the dispute was historic. The court also criticised the large amount of evidence that had been filed, including in particular a number of long witness statements containing “extensive argument”. As Fraser J. put it: “Notwithstanding the importance to both parties of the outcome...,, such a volume of evidence is not necessary. Submitting more numerous, and longer, witness statements than necessary is a temptation that parties generally seem unable to resist.”

[12] Before His Honour Judge Halliwell sitting as a judge of the high court at Manchester

Paragraph 2(1) of the Scheme provided that “following the giving of a notice of adjudication” (and subject to any agreement between the parties as to who shall act as adjudicator, and where no adjudicator or adjudicator nominating body was named in the contract) the referring party was to make a request to a nominating body to appoint an adjudicator. Paragraph 3 of the Scheme further provided that the request should be “accompanied by” a copy of the notice of adjudication. It was clear that the adjudication notice has to be given before the application to appoint the adjudicator was made. The judge held that the adjudicator was not validly appointed because Lane End had submitted its request for appointment of the adjudicator before giving its notice of adjudication, thereby breaching paragraph 2(1) and following Vision Homes[14]. Kingstone had also contended as an alternative that the adjudicator had effectively resigned and for that reason the award was of no effect. The judge rejected that submission. First, the adjudicator had not in fact resigned. Second, had he wished to do so, it would have been necessary for him to give notice to both parties, as required by paragraph 9(1) of the Scheme, and he had not done so. The next issue was whether Kingstone had waived the error in the adjudicator’s appointment by full participation without having made a sufficient and specific reservation of its position. The judge held the answer to this was that even had it wished to do so, Kingstone could not waive such an error.

The adjudication

An adjudicator was appointed by RICS. Kingstone immediately and throughout the process reserved their position as to his jurisdiction on various specific grounds and more generally though they did not initially articulate the point which eventually was taken in court. Their initial objection not later pursued was that the document relied on as the adjudication notice was not effective to commence proceedings. As a result of an automatic response from Lane End to his email[13], it appeared to the adjudicator that they had closed for business and he mistakenly stated that this brought the adjudication to an end. He did so in an email to Lane End but not copied to Kingstone. He did not in fact resign (as the court later found) but continued with the adjudication. He decided that the document relied on as the adjudication notice was effective. Despite the adjudicator’s jurisdiction and reservations of rights, Kingstone participated in the adjudication which ran its full course. further objections to

The adjudicator found for Lane End and awarded them the sum claimed.

In court

Lane End commenced proceedings and applied for summary judgment to enforce the award and Kingstone applied for a declaration that the award was a nullity and unenforceable on the grounds that the adjudicator had not been effectively appointed and lacked jurisdiction.

[13] Email dated 8 April 2020 from Lane End, stating that it was closed for business due to the coronavirus (COVID-19) pandemic. [14] Vision Homes Ltd v Lancsville Construction Ltd [2009] EWHC 2042 (TCC)

Comment

It was not merely a procedural defect in the adjudicator's appointment or the adjudication, rather the adjudicator "was not appointed to act in the adjudication at all" . Furthermore Kingstone had not in fact waived its right to object since they had insufficient knowledge of the facts to give such a waiver. There was no waiver by election because Kingstone were never in the position of having to make a choice. For the same or similar reasons, (amongst others, being that there was no reliance by Lane End on Kingstone’s stated position) the judge also rejected arguments that Kingstone was estopped from challenging the adjudicator's jurisdiction. In the result the application for summary judgment was dismissed and Kingstone succeeded on its application for a declaration.

The judgment goes into some detail on the questions of waiver and estoppel but the findings are largely fact based and therefore of limited application. What is of wider application is the finding that it is not possible to waive such a fundamental defect as a failure to appoint an adjudicator to act in the adjudication. It is also of interest to note that the judge exercised his discretion to exclude the evidence from the covert recording of the parties’ meeting and the witness evidence supporting that recording. He held that it had limited probative value and would give rise to procedural unfairness if admitted. It raised issues under the Human Rights Act 1998 though on preliminary consideration may not have breached such rights. It also raised issues under the General >Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16

Made with FlippingBook - Online Brochure Maker