Cornerstone – Adjudication in the event of insolvency

Given the current economic climate, coupled with the uncertainty surrounding Brexit, an increase in the number of contractor insolvencies and general disputes being referred to an adjudicator is (unfortunately) anticipated.

With this, it is critical to understand how both the adjudication and the insolvency regimes interact, when in effect, during the same dispute.

Recent case law has, on the face of it, been somewhat conflicting. In Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd [2018], the court granted an injunction to prevent an adjudicator from proceeding where the referring party entered into liquidation after the referral. But in Primus Build Ltd v Cannon Corporate Ltd [2018], the court decided to enforce the adjudicator’s decision despite the referring party entering into a company voluntary arrangement (CVA), and declined to grant a stay of execution.

Both cases went to the Court of Appeal, and Coulson LJ (formerly a judge in the Technology and Construction Court) heard the appeals together. He acknowledged an ‘unspoken suggestion’ that one must have been incorrectly decided, and concluded that proceeding to adjudication remained a right under the contract notwithstanding insolvency, and, therefore, that the adjudicator had and continues to have sufficient jurisdiction to consider a claim advanced by a party in liquidation. 

However, on a practical basis, Coulson LJ noted that although an adjudicator has jurisdiction, it is ‘inconceivable’ to bring a claim where the solvent respondent has a cross-claim, referring to that as an ‘exercise in futility’. This is because the solvent party would be able to counter-adjudicate for those claims, and in the event that an enforceable decision was made against it, would likely obtain a stay of enforcement against it in view of those cross-claims. In these circumstances, a referral by an insolvent company was ‘wrong in principle’ when considering the wider issue of costs in either the referral itself or subsequent enforcement. He commented that “in the ordinary case, even though the adjudicator may technically have the necessary jurisdiction, it is not a jurisdiction which can lead to a meaningful result”.

Coulson LJ went on to reiterate that each case is to be decided on its own facts and in the Bresco case it was ‘just and convenient’ to grant the injunction to prevent the adjudication proceeding. That, it was said, was “not on the grounds of theoretical jurisdiction” (in other words, the adjudicator had jurisdiction) “but on the grounds of practical utility” (that it would serve no purpose to allow adjudication to proceed).

On the Primus Build case, Coulson LJ said that the mere fact that the company had entered into a CVA did not mean that summary judgment should be refused or indeed a stay of execution should be granted. Again, each case would turn on its own individual facts. Here, the first instance decision was again upheld, with the judge noting that it would not interfere with the CVA process and, in fact, a stay of enforcement may have prevented the CVA from being concluded.

Comment

The decision is likely to be far reaching across the construction industry. It is common for liquidators to refer disputes to adjudication to recover sums owed to insolvent contractors, but this decision means that while that may be technically possible, it is likely in most cases to be futile. Ultimately, though, each case will have to be considered on its merits.

The court did, however, confirm that a claim for the balance under the terms of the contract was available through a claim under Rule 14.25 of the Insolvency (England and Wales) Rules 2016 (SI 2016/1024). Coulson LJ noted that this regime was very different from adjudication, being “a detailed account as between the company and the creditor, and the careful calculation of a net balance one way or the other, or quantifying the company’s net claim against a creditor” as opposed to adjudication being “a rough and ready process” which was “likely to result in injustice”. 

Although both avenues remain for parties in liquidation, adjudication now appears to be a dead end for recovery for insolvent parties.

For further information, please contact a member of Birketts’ Construction and Engineering Team.

This article is from the March 2019 edition of Cornerstone, our newsletter for those working in the construction industry. To download the latest issue, please visit the newsletter section of our website. Law covered as at March 2019.

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