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Liquidators cannot commence adjudication proceedings under construction contracts

Out-Law Legal Update | 23 Aug 2018 | 9:37 am | 2 min. read

LEGAL UPDATE: Insolvency set-off rules take precedence over the right under a construction contract to go to adjudication "at any time", the High Court has ruled. It said that a liquidator does not have the right to refer financial claims under a construction contract to adjudication as a quick and cheap way of settling disputes. The ruling will narrow the options of liquidators when seeking payments from solvent counterparties to a construction contract.

Whilst construction law permits a party to refer disputes under a construction contract to adjudication "at any time", the Technology and Construction Court (TCC) division of the High Court has ruled in a case between Michael J Lonsdale (Electrical) and Bresco Electrical Services that when a company goes into liquidation, individual claims are no longer capable of being enforced and are replaced by one single claim, following an account of the mutual debts and mutual dealings between the parties.

This single claim is not a dispute under a construction contract, but a calculation under the Insolvency (England and Wales) Rules 2016 (IR16), and therefore an adjudicator has no jurisdiction to hear the claim.

Under IR16 (and the previous 1986 Rules), when a company enters into liquidation a mandatory, automatic and self-operating set-off regime kicks in to calculate the value of claims owing to or from the company in liquidation (Rule 14.25 IR16 – previously Rule 4.90 IR86). Where the company has engaged in mutual dealings with a counterparty under a contract or series of contracts and the parties have acted in the same capacity, such as employer and contractor, an overall account will be made as to the sums owing by one party or the other, taking into account the claims of both parties.

In this case, Lonsdale employed Bresco to complete electrical installation works in 2014. Bresco stopped work under the contract in December 2014, with each party claiming the other had wrongfully terminated the contract. In March 2015, Bresco entered into liquidation. Lonsdale subsequently claimed for the costs of completing the works. In response, Bresco maintained Lonsdale had wrongfully terminated the sub-contract and was liable to pay damages to Bresco.

In June 2018, Bresco's liquidator commenced adjudication proceedings against Lonsdale on the basis that: Lonsdale had wrongfully terminated the contract and was in repudiatory breach; Bresco was entitled to be paid for the value of the works completed prior to it going into liquidation; Bresco was entitled to damages for loss of profit, and whether Lonsdale was entitled to deduct completion costs from sums due to Bresco.

Lonsdale applied to the High Court for an injunction preventing the adjudication from going ahead on the basis that the claims between the parties were governed by the Insolvency Rules and an adjudicator had no jurisdiction to hear the claims. The Court agreed with Lonsdale and refused to allow the adjudication to proceed for the reasons set out above.

This case is a landmark case for insolvency practitioners and the construction industry alike. The practice of liquidators threatening or commencing low cost adjudications as a tactic to reach settlements for the benefit of creditors, even where the enforcement of an adjudication could be stayed, is now far more difficult. The decision also makes it harder for liquidators to assign construction claims to funders or litigation specialists as a way of getting discounted funds into the insolvent estate upfront, without the risk of having to commence proceedings directly.

There is still the prospect of a liquidator commencing proceedings to settle a dispute around the account of claims under the Insolvency Rules or assigning a net claim in favour of the insolvent company to a third party funder. However, this decision will strengthen the resolve of solvent counterparties, given the limited cards available to the liquidator in seeking a quick and cheap resolution.

Insolvency cases are usually heard in the Chancery division of the High Court but this case was heard by the TCC because it was a dispute originating under a construction contract.

Andrew Robertson is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com