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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> John Doyle Construction Ltd v Erith Contractors Ltd [2021] EWCA Civ 1452 (07 October 2021) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2021/1452.html Cite as: 199 Con LR 30, [2022] 2 All ER (Comm) 379, [2021] Bus LR 1837, [2021] 2 CLC 739, [2021] WLR(D) 516, [2021] EWCA Civ 1452 |
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ON APPEAL FROM THE HIGH COURT
(TECHNOLOGY AND CONSTRUCTION COURT)
Mr Justice Fraser
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE COULSON
and
LORD JUSTICE EDIS
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John Doyle Construction Limited (In Liquidation) |
Appellant |
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- and - |
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Erith Contractors Limited |
Respondent |
____________________
Riaz Hussain QC (instructed by DLA Piper UK LLP) for the Respondent
Hearing date : 15 July 2021
____________________
Crown Copyright ©
LORD JUSTICE COULSON :
1. INTRODUCTION
2. THE FACTUAL BACKGROUND
"The primary business of HJ is to purchase legal claims from insolvent companies…HJ provides a solution, by purchasing the claim from from the Insolvency Practitioner and/or insolvent company and commencing proceedings itself. The Insolvency Estate will receive a mixture of upfront cash consideration and deferred consideration, calculated and paid by reference to the eventual outcome."
i) The Assignment Deed envisaged that it might not lead to an effective legal assignment, and in those circumstances provided that the claims against Erith would be held on trust for HJ "absolutely" (Clause 3.1);
ii) HJ paid JDC £6,500 for the assigned claims, with a further payment to JDC dependent on the outcome of the assigned claims (Clause 4);
iii) HJ had conduct and control of any proceedings pursued in relation to the assigned claims (Clause 8);
iv) Any sums recovered were to be paid to HJ; and
v) 45% of any net recovery in subsequent proceedings was to be paid out to JDC by HJ. In this way, HJ would retain 55% of the net recovery.
3. THE JUDGMENT
4. THE THREE GROUNDS OF APPEAL
5. BURDEN ON A CLAIMANT IN AN APPLICATION TO ENFORCE THE DECISION OF AN ADJUDICATOR
6. GROUND 1: THE RINGFENCING OR SECURITY OFFERED BY JDC IN RESPECT OF THE SUM IDENTIFIED IN THE DECISION
"107c) In relation to paragraph 53 of his witness statement, Mr Shaw raises an issue with the deadline of 180 days specified in Lloyd's letter of 27 March 2020. The concern, as I understand it, is that this may not be sufficient if Erith were to appeal the Court's decision. It is not clear on what basis Erith would make such an appeal, and, on that basis, Erith's complaint is thoroughly speculative. None the less, I would suggest that:
i) The 180 day deadline is sufficient;
ii) In the alternative, HJ would be willing to undertake to keep the monies in a separate account with Lloyds pending any appeal and to immediately return the monies to Erith in the event of a successful appeal (and as per the outcome of the appeal)."
7. GROUND 2: THE SECURITY OFFERED BY JDC IN RESPECT OF FUTURE COSTS ORDERS IN ERITH'S FAVOUR
"In response to paragraph 7.3 of Mr Shaw's second witness statement, we enclose this standard form wording of the bond ('Deed of Indemnity') which is to be provided by the insurers named in the ATE policy. Each insurer will issue a Deed of Indemnity for their share of the risk, as they are underwriting the risk on a several liability basis…in line with the submission set out in the Claimant's skeleton argument served prior to the original hearing date, if a Bond is to be put in place, the costs of the same should be met by a cross-undertaking in damages from [Erith], in line with recent authorities".
The template Deed of Indemnity was enclosed with the letter.
110. "Reliance is also placed by JDC on what is said to be a "standing offer" to provide a Deed of Indemnity or Bond. However, that "standing offer" is part of the ATE Policy, and is offered by the Insurer, TM Legal, as defined in the policy "to meet a security for costs order" (emphasis added). The dispute defined in the Schedule states "the claim will be brought either by John Doyle Company Ltd (acting by its liquidators) or Henderson & Jones Ltd as assignee (as beneficiary under a trust)". It is not something outside of, or additional to, the ATE Policy, but in any event it would be available if an action were commenced by JDC and a security for costs order was made against it. JDC might not commence such proceedings; indeed, if this summary judgment application is successful, it is difficult to envisage circumstances in which JDC would choose to do so. The Deed of Indemnity would not, on the face of it, provide security in respect of a costs order made in proceedings commenced by Erith against JDC, which is a rather different scenario, and the more likely way that subsequent proceedings would unfold."
8. GROUND 3: INSOLVENCY RULE 6.42
9. IS A COMPANY IN LIQUIDATION ENTITLED TO ENTER JUDGMENT IN THESE CIRCUMSTANCES?
9.1 The Law
"Bankruptcy set-off, on the other hand, affects the substantive rights of the parties by enabling the bankrupt's creditor to use his indebtedness to the bankrupt as a form of security. Instead of having to prove with other creditors for the whole of his debt in the bankruptcy, he can set-off pound for pound what he owes the bankrupt and prove or pay only the balance".
In this way, Lord Hoffman concluded that the original chose in action ceased to exist and was "replaced by a claim to a net balance".
"33. The importance of the rule is illustrated by the circumstances in the present case. If Bouygues is obliged to pay to Dahl-Jensen the amount awarded by the adjudicator, those monies, when received by the liquidator of Dahl-Jensen, will form part of the fund applicable for distribution amongst Dahl-Jensen's creditors. If Bouygues itself has a claim under the construction contract, as it currently asserts, and is required to prove for that claim in the liquidation of Dahl-Jensen, it will receive only a dividend pro rata to the amount of its claim. It will be deprived of the benefit of treating Dahl-Jensen's claim under the adjudicator's determination as security for its own cross-claim.
34. Lord Hoffman pointed out, at page 252 in Stein v Blake that the bankruptcy set-off requires an account to be taken of liabilities which at the time of the bankruptcy may be due but not yet payable, or which may be unascertained in amount or subject to contingency. Nevertheless, the insolvency code requires that the account shall be deemed to have been taken, and the sums due from one party shall be set off against the other, as at the date of insolvency order. Lord Hoffman pointed out also that it was an incident of the rule that claims and cross-claims merge and are extinguished; so that, as between the insolvent and the other party, there is only a single claim - represented by the balance of the account between them. In those circumstances it is difficult to see how a summary judgment can be of any advantage to either party where, as the 1996 Act and paragraph 31 of the Model Adjudication Procedure make clear, the account can be reopened at some stage; and has to be reopened in the insolvency of Dahl-Jensen.
35. Part 24, rule 2 of the Civil Procedure Rules enables the Court to give summary judgment on the whole of a claim, or on a particular issue, if it considers that the defendant has no real prospect of successfully defending the claim and there is no other reason why the case or issue should be disposed of at a trial. In circumstances such as the present, where there are latent claims and cross-claims between parties, one of which is in liquidation, it seems to me that there is a compelling reason to refuse summary judgment on a claim arising out of an adjudication which is, necessarily, provisional. All claims and cross-claims should be resolved in the liquidation, in which full account can be taken and a balance struck. That is what rule 4.90 of the Insolvency Rules 1986 requires"
"59. The starting point, once it is appreciated that there is jurisdiction under section 108 in such circumstances, is that the insolvent company has both a statutory and a contractual right to pursue adjudication as a means of achieving resolution of any dispute arising under a construction contract to which it is a party, even though that dispute relates to a claim which is affected by insolvency set-off. It follows that it would ordinarily be entirely inappropriate for the Court to interfere with the exercise of that statutory and contractual right. Injunctive relief may restrain a threatened breach of contract but not, save very exceptionally, an attempt to enforce a contractual right, still less a statutory right."
I have taken that to be the ratio of Bresco. Mr Constable agreed.
"64. Thus it is no answer to the utility (rather than futility) of construction adjudication in the context of insolvency set-off to say that the adjudicator's decision is unlikely to be summarily enforceable. The reasons why summary enforcement will frequently be unavailable are set out in detail in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2001] 1 All ER (Comm) 1041, paras 29-35 per Chadwick LJ. As he says, the Court is well-placed to deal with those difficulties at the summary judgment stage, simply by refusing it in an appropriate case as a matter of discretion, or by granting it, but with a stay of execution. There is in those circumstances no need for an injunction, still less a need to prevent the adjudication from running its speedy course, as a potentially useful means of ADR in its own right.
65. Furthermore it will not be in every case that summary enforcement will be inappropriate. There may be no dispute about the cross-claim, and the claim may 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. Or the disputed cross-claim may be found to be of no substance. Or, if the cross-claim can be determined by the adjudicator, because the claim and cross-claim form part of the same "dispute" under the contract, the adjudicator may be able to determine the net balance. If that is in favour of the company, there is again no reason arising merely from the existence of cross-claims why it should not be summarily enforced.
66. True it is that the adjudicator may over-value the net balance in favour of the company, so that summary enforcement may leave the respondent to the reference having first to establish a true balance in its favour and then to pursue it by proof (or possibly as a liquidation expense) against an under-funded liquidation estate. But over-valuation is a problem that may arise in any liquidation context, even where there is no cross-claim. There is no suggestion that, absent insolvency set-off, adjudication is ordinarily futile merely because the company making the reference is in liquidation or distributing administration.
67. The proper answer to all these issues about enforcement is that they can be dealt with, as Chadwick LJ suggested, at the enforcement stage, if there is one. In many cases the liquidator will not seek to enforce the adjudicator's decision summarily. In others the liquidator may offer appropriate undertakings, such as to ring-fence any enforcement proceeds: see the discussion of undertakings in the Meadowside case. Where there remains a real risk that the summary enforcement of an adjudication decision will deprive the respondent of its right to have recourse to the company's claim as security (pro tanto) for its cross-claim, then the Court will be astute to refuse summary judgment."
9.2 Discussion
10 STAY OF EXECUTION AND OTHER MATTERS
10.1 Stay of Execution
10.2 The Respondent's Notice
LORD JUSTICE EDIS:
LORD JUSTICE LEWISON:
"Bankruptcy set-off, on the other hand, affects the substantive rights of the parties by enabling the bankrupt's creditor to use his indebtedness to the bankrupt as a form of security. Instead of having to prove with other creditors for the whole of his debt in the bankruptcy, he can set off pound for pound what he owes the bankrupt and prove for or pay only the balance." (Emphasis added)
"[Insolvency set-off] produces a balance upon the basis of which the bankruptcy administration can proceed. Only that balance can be claimed in the bankruptcy or recovered by the trustee. If its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recovered in proceedings by the trustee." (Emphasis added)
"In my judgment the conclusion must be that the original chose in action ceases to exist and is replaced by a claim to a net balance. If the set-off is mandatory and self-executing and results, as of the bankruptcy date, in only a net balance being owing, I find it impossible to understand how the cross-claims can, as choses in action, each continue to exist."
"If there have been mutual dealings before the winding up order which have given rise to cross-claims, neither party can prove or sue for his full claim. An account must be taken and he must prove or sue (as the case may be) for the balance." (Emphasis added)
"If there are indeed mutual credits or mutual debts or mutual dealings between a company, or a bankrupt, and a creditor, then the set-off applies notwithstanding that one or other of the debts or credits may be secured."
"If there is set-off between [the directors] and B.C.C.I. that must automatically reduce or extinguish the indebtedness to B.C.C.I. of the companies. The statutory set-off is not something which B.C.C.I. can, as it were, place in a suspense account. It operates to reduce or extinguish the liability of the guarantor and necessarily therefore operates as in effect a payment by him to be set against the liability of the principal debtor. A creditor cannot sue the principal debtor for an amount of the debt which the creditor has already received from a guarantor."
"I do not accept that there is any such inherent power. The courts have, in my judgment, no more inherent power to disapply the statutory insolvency scheme than to disapply the provisions of any other statute."
"The position is, therefore, that since the Judicature Acts there may be (1) a set-off of mutual debts; (2) in certain cases a setting up of matters of complaint which, if established, reduce or even extinguish the claim, and (3) reliance upon equitable set-off and reliance as a matter of defence upon matters of equity which formerly might have called for injunction or prohibition."
"Reliance may be placed in a court of law upon any equitable defence or equitable ground for relief: so also any matter of equity on which an injunction against the prosecution of a claim might formerly have been obtained may be relied on as a defence. This may involve that there will have to be an ascertainment or assessment of the monetary value of the cross-claim which, as a matter of equity, can be relied on by way of defence. But this does not mean that all cross-claims may be relied on as defences to claims."
"In my judgment, therefore, the defendant succeeded in defeating the claim of the plaintiff and in establishing his right to £10 1s. 9d. on the counterclaim. It becomes necessary to consider what is the fair order to make as to costs on this altered and different basis. I think that there should be judgment for the defendant on the claim with costs on scale 4: that there should be judgment for the defendant for £10 1s. 9d. on the counterclaim with costs on scale 2…"
"The judge ought therefore, they say, to have given judgment with costs for the tenants, in the landlords' action for rent, and judgment with costs for the tenants on their counterclaim in a sum representing the excess of the damages over the rent, with interest on that balance. An order in that form would produce a substantially more favourable result for the tenants, in terms not only of costs but also of interest."
"Within the liquidation, a net balance owing to the creditor must be pursued by proof of debt in the ordinary way. The liquidator is entitled to be paid the full amount of any net balance owing by the creditor, and may exercise any available remedies for its quantification and recovery, including litigation, arbitration or ADR…" (Emphasis added)
"If there is no dispute as to the existence and amount of the claims and cross-claims this is in practice a matter of simple arithmetic, the net balance being the difference between the aggregate of the claims and the aggregate of the cross-claims. But if any of the claims and cross-claims are in dispute, then those disputes will need first to be resolved, by reference to the individual merits of each, before the arithmetic resumes…"
"… adjudication has, as was always intended, become a mainstream method of ADR, leading to the speedy, cost effective and final resolution of most of the many disputes that are referred to adjudication. Dispute resolution is therefore an end in its own right, even where summary enforcement may be inappropriate or for some reason unavailable." (Emphasis added)
"In circumstances such as the present, where there are latent claims and cross-claims between parties, one of which is in liquidation, it seems to me that there is a compelling reason to refuse summary judgment on a claim arising out of an adjudication which is, necessarily, provisional. All claims and cross-claims should be resolved in the liquidation, in which full account can be taken and a balance struck. That is what rule 4.90 of the Insolvency Rules 1986 requires."
"… As he says, the court is well placed to deal with those difficulties at the summary judgment stage, simply by refusing it in an appropriate case as a matter of discretion, or by granting it, but with a stay of execution. There is in those circumstances no need for an injunction, still less a need to prevent the adjudication from running its speedy course, as a potentially useful means of ADR in its own right.
[65] Furthermore it will not be in every case that summary enforcement will be inappropriate. There may be no dispute about the cross-claim, and the claim may 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. Or the disputed cross-claim may be found to be of no substance. Or, if the cross-claim can be determined by the adjudicator, because the claim and cross-claim form part of the same "dispute" under the contract, the adjudicator may be able to determine the net balance. If that is in favour of the company, there is again no reason arising merely from the existence of cross-claims why it should not be summarily enforced."
"The proper answer to all these issues about enforcement is that they can be dealt with, as Chadwick LJ suggested, at the enforcement stage, if there is one. In many cases the liquidator will not seek to enforce the adjudicator's decision summarily. In others the liquidator may offer appropriate undertakings, such as to ring-fence any enforcement proceeds: see the discussion of undertakings in the Meadowside case 186 Con LR 148. Where there remains a real risk that the summary enforcement of an adjudication decision will deprive the respondent of its right to have recourse to the company's claim as security (pro tanto) for its cross-claim, then the court will be astute to refuse summary judgment."
"[84] As near as possible, the safeguards must seek to place the responding party in a similar position to if the company was solvent. I recognise that it is unlikely that this would be wholly achieved. First, it is likely that should a responding party want to pursue its cross-claim in further litigation, it would likely be solely for the purposes of seeking repayment of any sum awarded, and it would be unlikely to benefit from a finding that it was the true creditor in the insolvency (other than to the extent of recovery of sums paid pursuant to the adjudication). Second, there would be an element of irrecoverable costs. Whilst this is the ordinary exigency of any litigation, this downside is more acute in litigation where the upside of success is limited by reason of the opposing parties' insolvency. Third, the requirement imposing a time limit in which the responding party must take steps to overturn the adjudication may involve a party bringing a claim earlier than the Limitation Act 1980 might otherwise have required it."
"… the rule is that everybody who had a subsisting claim at the time of the adjudication, the insolvency, the creation of the trust for creditors, or the administration decree, as the case may be, is entitled to participate in the assets, and that the Statute of Limitations does not run against this claim, but, as long as assets remain unadministered he is at liberty to come in and prove his claim, not disturbing any former dividend."
"The liquidator is entitled to distribute the assets in accordance with the rules and such distributions cannot afterwards be disturbed. In re House Property and Investment Co Ltd, in which a landlord tried unsuccessfully to require the liquidator of its original tenant company to set aside a fund to pay the rent if the assignee should default, illustrates all these principles very well. On the other hand, it is also a rule of winding up that a creditor may submit a proof or amend an existing proof at any time during the liquidation. The rule that prior distributions cannot be disturbed means that it may not do him much good, but in principle he is entitled to make his claim."
Note 1 I acknowledge that the parties consented to the adjudicator’s repeated requests for an extension, but it is always difficult for either party to refuse such requests once an adjudication – with all its attendant costs and effort - is up and running. The mere fact that this adjudication took so much longer than the statutory process envisages could be said to support the proposition that, just because construction adjudication is quick and cheap, it does not make it an appropriate dispute resolution method in every case. [Back] Note 2 I note that Mr Constable was the deputy judge who decidedMeadowside. [Back] Note 3 This is discussed in greater detail in Section 9 below. [Back] Note 4 The average time for the conclusion of a two party action of this kind in the TCC is about 15 months. [Back] Note 5 Much of this analysis would also apply to a payment into an escrow account. [Back] Note 6 What he actually said was: “it would be possible to ask Thomas Miller to put in place a security bond”. [Back] Note 7 I am afraid that that is JDC/HJ’s approach (outlined in paragraph 35 above) in action. [Back] Note 8 The figure was asserted, without evidence, in JDC’s lengthy post-hearing submissions where it again had nothing to do with the question that the judge asked the parties to address. [Back]