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Can an insolvent contractor refer a dispute to adjudication? If so, is there any point in doing so?

  • Market Insight 19 June 2020 19 June 2020
  • UK & Europe

  • Infrastructure

Days ago a lawyer's answer to these questions would have been the all too often heard "well, it depends". There would have been a serious risk of any such adjudication being stopped by the court granting a mandatory injunction to halt it. Ask the same questions again now and the response would be a resounding "yes and yes!"

Can an insolvent contractor refer a dispute to adjudication? If so, is there any point in doing so?

The Supreme Court has, in its judgment in Bresco v Lonsdale1, cut through what could have been a long line of authorities that were trying to work their way around the original and Court of Appeal decisions in Bresco, by creating exceptions to the rule that any such adjudication would have been "futile" and should be stopped, as seen in Meadowside2 and Balfour Beatty3.

In a nutshell, an adjudicator does have jurisdiction to hear a claim from a referring party which is a company in insolvent liquidation, even though the responding party has cross claims which it may raise as defences to the claim. The Supreme Court has decided that, in such circumstances, the adjudication process is not replaced by the insolvency process - which involves the delivery of proofs of debt to the liquidator - but rather that the processes live together. Further, it has ruled that the adjudication process is not "futile" in these circumstances. It held: "the adjudicator's resolution of the construction dispute referred by the liquidator may be of real utility to the conduct of the process of set-off within the insolvency process as a whole". It thus rejected arguments that an adjudicator would lack jurisdiction because of the existence of the insolvency process and that adjudication was inherently incompatible with the insolvency regime. This judgment is likely to have a significant impact, in increasing the number of adjudication claims, especially in the current economic climate, where sadly insolvency is once more a considerable threat to contractors.

To be specific, the Bresco case concerns the issue of whether the liquidator of a contracting company in insolvent liquidation can bring a claim to adjudication following the liquidation, where the responding party can raise cross-claims as defences to it. Prior to the Supreme Court's decision in Bresco, it had been thought that adjudication would not be open to the liquidator, and that the liquidator would be required to follow the insolvency (proof of debt) process. The Supreme Court has now ruled that adjudication is a process which is open to the liquidator. It co-exists with the insolvency process.

Briefly, the key facts in Bresco were as follows. Bresco was an electrical sub-contracting company. It entered into an electrical installation subcontract with its main contractor, Lonsdale, for electrical installation works. Part of the way through the subcontract, disputes emerged between the parties and Bresco left the site. At that point, Lonsdale engaged a  replacement electrical subcontractor. Each party alleged that the other had committed a repudiatory breach of the subcontract and that it had a claim against the other. Bresco then entered into insolvent liquidation. Its liquidator sought to bring Bresco's claim against Lonsdale to adjudication.  Lonsdale went to court for an injunction to halt the adjudication.  It did so on the basis that the adjudicator lacked jurisdiction because Bresco's liquidation brought the insolvency process into play and since the two regimes of adjudication and insolvency set-off were fundamentally incompatible. Lonsdale argued that the latter regime prevailed, following Bresco's insolvency.

The Court of Appeal upheld the first instance decision of the Technology and Construction Court (TCC) to grant an injunction to Lonsdale, to prevent the adjudication from continuing, based on the "futility argument": that is that it would be futile to allow the adjudication process to continue when the decision wouldn't be enforced in favour of a company in liquidation, where there was a cross-claim, or at least only in exceptional circumstances.

Coulson LJ didn’t agree with the TCC's view that the adjudicator didn't have jurisdiction because the contractual claim ceased to exist on liquidation, due to insolvency set-off, as had been held by the TCC. If insolvent parties were entitled to pursue litigation or arbitration, as was accepted by Lonsdale's counsel, then the contractual claim continued to exist and they should also be able to pursue adjudication. However, Coulson LJ remarked: 'even though the adjudicator may technically have the necessary jurisdiction, it is not a jurisdiction which can lead to a meaningful result'.

As mentioned above, the finding in Bresco at first instance and in the Court of Appeal that the adjudication was effectively futile was based on the perceived incompatibility of the adjudication and the insolvency regimes. The processes in themselves are different and set out to achieve different results. The aim of the insolvency regime is to assess all of the parties' claims and cross-claims together, to achieve a net accounting position between them, so that the solvent party can either pay the balance to or claim it from the liquidator (as the case may be) in the liquidation process. Most adjudications consider isolated claims with the aim of quickly and cheaply determining them and increasing cashflow – Coulson LJ used 'smash and grab' adjudications as an example of this.

There were a number of wider considerations that lead to the conclusion of the lower courts that to continue the adjudication would be 'an exercise in futility' (unsurprisingly - particularly in an insolvency context - the crux of them either came down to money, or a waste of it) as follows:    

  • a liquidator has limited assets available to it to pursue claims and the adjudicator's decision would be of no use to the liquidator for the purpose of assessing the parties' mutual debts;
  • the responding party would incur costs in defending an adjudication in the knowledge that the adjudicator's decision probably wouldn't be enforced anyway;
  • the responding party would incur further costs in bringing its cross-claim against a company in insolvent liquidation. To add insult to injury, security for costs would not be available because the responding party would be the claimant; and
  • lastly, a likely resulting increase in the number of enforcement applications would put further strain on the already overburdened resources of the TCC.

The Supreme Court disagreed with the above considerations and held unanimously in support of adjudication. In particular, it noted that the right to bring a dispute arising under a construction contract to adjudication is enshrined in statute (and in this case, in the subcontract's provisions too), which right is "a powerful consideration favourable both to its recognition as a matter of construction, and to the caution which the court ought to employ before preventing its exercise by injunction". The Supreme Court went on to say that "it would be entirely inappropriate for the court to interfere with the exercise of a 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". Further, agreeing with the Court of Appeal, the Supreme Court did not "regard construction adjudication as in any way incompatible with the operation of the insolvency code in general, or with insolvency set-off in particular." 

Insolvency set-off does not mean that the liquidator has to bring all disputes about the claims and cross-claims to be set off in a single proceeding; the liquidator can "untangle a complex web of disputed issues … by picking some as suitable for adjudication." It follows that the underlying disputes under the construction contract do not fall away such that they fall outside the jurisdiction of an adjudicator. Lord Briggs (who gave the Supreme Court's unanimous judgment) used the extreme, albeit compelling, example of an argument that a £25 cross-claim against a £300,000 claim should deprive a company in liquidation of its right to adjudicate and said it would be "a triumph of technicality over substance".

Equally an adjudicator has the jurisdiction to determine all defences that are advanced by the solvent responding party, including cross-claims pleaded by way of set –off as defences. The only thing an adjudicator wouldn't be able to do, if the cross-claim extinguished the whole amount of the insolvent company's claim, would be to award any balance to the responding party but he could dismiss the claim and even make a declaration as to the value of the cross-claim.

The Supreme Court also considered the wider considerations discussed above and came to the conclusion that they didn't afford any proper basis for granting an injunction to restrain the pursuit of an adjudication.

In dismissing the argument that allowing an adjudication to proceed would be an exercise in futility for the reasons outlined above, the Supreme Court reasoned that there was utility in allowing a professional construction industry expert to sit as an adjudicator and make a decision, which could assist the insolvency process of off-setting  the parties' mutual dealings, by the rendering of a provisionally binding decision on one or more parts of those dealings.

The Supreme Court's decision will result in more liquidators seeking to commence adjudications on behalf insolvent contractors. However, solvent responding parties against whom adjudicators' decisions are made, may still resist enforcement of such decisions, when liquidators bring enforcement actions to court. As Lord Briggs noted in his judgment, there is still the possibility of the court refusing to enforce the adjudicator's decision or granting a stay of execution of any judgment it decides to enter, on account of insolvency considerations.

[1] Bresco Electrical Services Ltd (in liquidation)  v Michael J Lonsdale (Electrical) Ltd [2019]

[2] Meadowside Building Developments Ltd (in Liquidation) v 12-18 Hill Stree Management Co Ltd [2019]

[3] Balfour Beatty Group Limited v Astec Projects Limited (in Liquidation) [2020]

End

Additional authors:

Sharni Mellors

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