Adjudication in insolvency is now back on… or is it?

The Supreme Court has given a robust and clear headed review of the use of adjudication to determine accounts and disputes in the construction industry. After many months of bated breath, they have given their definitive and ground breaking decision in Bresco Electrical Services Ltd (In Liquidation) v Michael Jay Lonsdale (Electrical) Ltd [2020] UKSC 25.

The court concluded that no incompatibility existed between the insolvency and the adjudication regimes, that Bresco did have both a statutory and contractual right to adjudicate and that the court should not stand in the way of those rights.

Bresco v Lonsdale; how did we get here?

Both companies were electrical contractors – after Bresco walked off site in August 2014 alleging repudiatory breach (it subsequently entered Creditors Voluntary Liquidation in March 2015), the parties made a number of allegations against each other (both invariably relying upon a repudiatory breach) until, in June 2019, Lonsdale served a notice of intention to adjudicate seeking £325,000. 

Bresco responded with its own notice, seeking payment of £219,000; Lonsdale’s response to this was to argue that there was no jurisdiction to adjudicate the matter and even if there was, it would be futile to do so.

At the same time, Lonsdale sought an injunction in the Technology and Construction Court who, at the first instance, upheld Lonsdale’s claims and granted an injunction (preventing Bresco from pursuing its adjudication). Bresco appealed and was successful in the Court of Appeal with its argument regarding jurisdiction, but the court continued the injunction granted in the TCC arguing that to allow the adjudication to proceed when there could be no enforcement would be “an exercise in futility and a waste of time and money”.  Bresco appealed the continued injunction whilst Lonsdale cross-appealed the issue of jurisdiction.

After a very succinct and helpful summary of the two regimes, the Supreme Court unanimously held that an adjudicator did have jurisdiction to decide the matter, even in the instance of one party’s insolvency, that there was no incompatibility between the two regimes and, instead of the process being an exercise in futility, there would be a benefit to the overall position between the parties in pursuing the claim by the use of adjudication.

How to get adjudication back on the table

Whilst a creditor of an insolvent company still has to prove its claim in the insolvency (part 14 of the Insolvency Rules 2016), the liquidator can pursue the company’s claim as he sees fit, notwithstanding the fact that the insolvency set off allowed by rule 14.25 of the Insolvency Rules 2016 applies automatically. 

Taking its dispute to adjudication is an inalienable right of a party to a construction contract (section 108 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the Act)) by default if contracts are silent on this. In this particular instance, there was provision within the contract to refer disputes to adjudication. 

Adjudication is a very attractive dispute resolution process for a liquidator as it is extremely fast and cost effective. From start to finish, the Act expects disputes to be resolved in 28 days, instead of months and years at court. However, it has its peculiarities and own body of case law as;

• You can only refer ONE dispute at a time
• Adjudication is only temporarily binding and each party has the right to seek a final determination in court or arbitration
• Adjudication is enforced through a fast 28 day summary judgement process in the TCC
• If the creditor is likely to be unable to repay any award, the court will not enforce the award. A Pyrrhic victory has no place in insolvency debt recovery – this is the futility argument.

Lonsdale went for one of the favoured lines and argued that, as a consequence of the insolvency set off, there could be no ‘single dispute’ between the parties; insolvency set off meant that all claims and counter claims under the contract between the parties would cease to exist and instead be replaced by the taking of an account, the purpose of which was to ascertain the balance outstanding between the parties.

The Supreme Court disagreed: an adjudicator can determine more than one issue if the parties agree, and, on the basis that all claims referred to adjudication will confer a jurisdiction to determine everything which may be advanced by way of a defence, to include every cross claim which would amount to a set off. 

In coming to this conclusion, the court followed what it considered to be a useful rule of thumb -where there were several disputes, and disputed claim number 1 cannot be decided without deciding all or part(s) of dispute number 2, which establishes a clear link and points to there being only one dispute, this can create a “single dispute”. 

On the issue of futility, the Supreme Court took the view that, before a final account can be taken in the insolvency process, the liquidator and creditor still need to resolve any disputes or cross claims, together with all mutual dealings that may have arisen under that contract. In their view, pursuing an adjudication would, instead of being an act of futility, be an act of utility and even if there are other unrelated issues which an adjudicator cannot deal with, that is no reason not to value the claim. The fast cheap adjudication option to get to a final position on an account had to be attractive.

Additionally, the fact that an adjudicator’s decision is unlikely to be summarily enforceable is a matter for the court to decide, should it ever be asked to do so, and the courts should be extremely reluctant and hesitant to prevent the same from being pursued, especially where the parties to the contract have both a statutory and contractual entitlement to those procedures.

The net effect of this is that the Supreme Court’s decision may very well lead to a revival of adjudications (whether they have been put on hold pending the outcome of this recent decision). 

Does this help me?

Construction insolvencies are rife and will increase. Having a cheap, fast and cost effective third party expert determination of a discrete point or the value of the account between the parties has to be attractive to liquidators.

Construction projects are high value and require a specialist valuation process (usually by quantity surveyors). The debts are therefore correspondingly large and contentious, but for the previous case law which prevented the use of adjudication, were often priced out of recovery by the need for complex lengthy and expensive court proceedings. Liquidators could rarely afford to take them on, and no third party legal advisors would take them on on a ‘no win, no fee’ basis, given the risk and expert disbursement cost.

Being able to access a quick, rough and ready determination of the balance owed on a project will be invaluable.

Invaluable only if the other side pay?

The bar on enforcement of the adjudicator’s award is still a concern; not a fatal bar though, as the courts will look to ATE insurance, bonds and security for costs as a means to enable the cash to flow after a successful adjudication.

The other point to note is that most awards are paid without challenge. The fight tends to go out of the dispute in the face of the adjudicator’s fee note at the end of process.

Our specialist team of insolvency practitioners, construction lawyers and in house quantity surveyors are uniquely placed to help guide you to the best possible outcome and help you avoid any pitfalls of this technical area.  Please contact Alan Meiklejohn at [email protected] for more information or advice.