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19 June 2020 0 Comments
Posted in Construction

Adjudication and insolvency – has the landscape just shifted?

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In a recent decision (Bresco Services Limited v Michael J Lonsdale [2020] UKSC 25) the Supreme Court has held that an insolvent company retains the right to refer a dispute to adjudication, and only in ‘very exceptional circumstances’ should the court restrain the exercise of that right.

Liquidators pursuing claims under construction contracts on behalf of insolvent companies now have a green light to pursue these claims in adjudication and force the other party into deciding whether to incur irrecoverable costs in defending such adjudications or to try to reach an agreed compromise.

What is the background?

Bresco was an electrical contractor and had agreed to carry out works for Lonsdale under a construction contract, to which s108 of the 1996 Act applied. In December 2014 Bresco left site, alleging repudiatory breach by Lonsdale. In March 2015 Bresco entered into a creditors’ voluntary liquidation.

In 2017 both Bresco and Lonsdale advanced claims for repudiatory breach of contract against the other. Both parties claimed damages against the other and denied the other’s claims in their entirety.

In June 2018 Bresco served an adjudication notice on Lonsdale. In response Lonsdale issued proceedings in the Technology and Construction Court applying for an injunction to restrain the adjudication from proceeding.

Lonsdale’s application for an injunction was based on two grounds

Firstly, where one of the parties is insolvent the solvent party is entitled to set off against any sums owed to the insolvent party any debts that may be due to the solvent party. An Adjudicator appointed under the Housing Grants, Construction and Regeneration Act 1996 (as amended) (“the 1996 Act”) has no power or authority to investigate or determine all of the sums due or debts owing between the parties and so he or she will be unable to properly determine or apply the solvent party’s rights of set off.

Secondly, since an adjudicator’s decision is only intended to be temporarily binding pending final determination in either court or arbitration, a court should be reluctant to order a solvent party to pay an insolvent party where there is little prospect of the insolvent party being able to repay the sums determined due by the adjudicator.

In short, Lonsdale contended that the adjudication process commenced by Bresco was “an exercise in futility” which served no useful purpose and so it should be restrained by injunction in order to prevent costs being wasted.

At first instance, Mr Justice Fraser found in favour of Lonsdale. He agreed that the adjudicator lacked the necessary jurisdiction to properly determine and apply the set off provisions on an insolvency.

On appeal, the Court of Appeal disagreed with Lonsdale on the jurisdiction point, but upheld the injunction on the basis that an adjudicator’s decision is only intended to be temporarily binding and a solvent party should not therefore be ordered to pay sums to an insolvent party.

Bresco therefore appealed to the Supreme Court.

The Supreme Court’s judgement

In the leading judgment (with which the other Lords agreed), Lord Briggs confirmed that the right to refer a dispute to adjudication ‘at any time’ was a “statutory and contractual right” that was “not affected” by the operation of the set-off provisions under the Insolvency Rules.

He went on to say that “it would ordinarily be entirely inappropriate for the court to interfere with the exercise of [the] statutory and contractual right” and the court’s power to give injunctive relief to restrain a party from referring a dispute to adjudication should only be exercised in “very” exceptional circumstances.

Lord Briggs did not accept that adjudication by an insolvent company was ‘an exercise in futility’. Instead, he noted that that the resolution of the underlying dispute by an adjudicator could be very helpful as it would assist, at least in part, in determining the appropriate set-off within the insolvency process.

He concluded by noting that the issue as to whether an adjudicator’s decision in favour of an insolvent party should be enforced was a matter that could be addressed by the court after the adjudicator’s decision has been reached.

So what does this mean in the current climate?

Whereas before this decision responding parties facing an adjudication from a insolvent party may have been able to restrain that adjudication from proceeding at all, it will only be in very exceptional circumstances that they will now be able to do so.

Liquidators pursuing claims under construction contracts on behalf of insolvent companies now have a green light to pursue these claims in adjudication and force the other party into deciding whether to incur irrecoverable costs in defending such adjudications or to try to reach an agreed compromise.

This is of particular concern in the current economic climate, where recent reports suggest that construction output has fallen by 40% in April 2020 as a result of the coronavirus pandemic and there has been a significant increase in companies entering formal insolvency processes, such as administration and liquidation.

Although Lord Briggs noted in Bresco that it is open to the responding party to raise concerns about the risk of recovery of any overpayment at the enforcement stage, in Construction Co 2000 Ltd v Vago [2005] BLR 374 the court noted that even if the referring party’s financial position suggested it would be unable to repay any judgment sum if ordered to do so, this would not by itself be sufficient justify a stay of enforcement if (a) its financial position was the same or similar to that when it entered into the contract; or (b) its straitened financial circumstances are due, either wholly or in part, to the responding party’s failure to pay the amount determined in the adjudicator’s decision.

Recent decisions on enforcement of an adjudication award such as Granada Architectural Glazing Ltd v RGB P&C Ltd [2019] EWHC 3296 (TCC) and Broseley London Ltd v Prime Asset Management Ltd [2020] EWHC 944 (TCC) have shown that even when there are concerns about the claimant’s ability to repay the award if ordered to do so, the courts are loath to interfere with an adjudicator’s award.

It appears that the courts continue to hold dear the primacy of adjudication on public policy grounds, first stated in Macob Civil Engineering Ltd v Morrison Construction Ltd [1999] EWHC Technology 254 and confirmed in Carillion Construction Ltd v Devonport Royal Dockyard [2005] EWHC 778 (TCC), that an adjudicator’s decision will be enforceable even if it results from an error of procedure, fact or law, but not if the adjudicator has acted in excess of jurisdiction or in serious breach of the rules of natural justice.

It is therefore more important than ever for those engaged in the construction industry to scrutinise the financial position of any party that they are intending to contract with.

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