Supreme Court: adjudication compatible with UK insolvency regime

Out-Law News | 17 Jun 2020 | 12:52 pm | 4 min. read

Companies in liquidation can refer claims to an adjudicator under construction law despite the existence of the insolvency regime, the UK's highest court has ruled.

In a landmark judgment for the construction industry, the Supreme Court unanimously ruled that adjudicators have jurisdiction to resolve claims started by companies in liquidation and that those adjudications are not an "exercise in futility".

Giving the leading judgment, Lord Briggs decided that courts should only "very exceptionally" grant injunctions to stop companies in liquidation from starting adjudications.

Davies Lawrence

Lawrence Davies

Partner

The Supreme Court has opened the door to adjudications being started by companies in the construction industry who have become insolvent

Construction disputes expert Lawrence Davies of Pinsent Masons, the law firm behind Out-Law, said the eagerly anticipated decision means that contractors can expect to receive a significant increase in adjudications brought by insolvent sub-contractors, especially in light of the economic difficulties many companies in the construction industry are likely to face as a result of the Covid-19 pandemic.

"The Supreme Court has opened the door to adjudications being started by companies in the construction industry who have become insolvent," Davies said. "Contractors can expect to see more of these claims in the years ahead."

"This means that the contractor will have to expend costs, which it will not recover, if it wishes to defend the claim but if it has a cross-claim may advance that in the adjudication as a set-off defence. If the cross-claim is held by the adjudicator to exceed the liquidator’s claim, the adjudicator can make a declaration to that effect but not an order for payment."

Insolvency law expert Andrew Robertson of Pinsent Masons said: "Today’s decision of the Supreme Court will make it easier for companies in liquidation using adjudication, which is a quick and relatively cheap process, to exert pressure on solvent counterparties to pay or settle claims under construction contracts in a manner which they have not been able to do previously. It is likely to lead to a flurry of adjudications being commenced by liquidators around final account disputes, releases of retention and outstanding payment applications. It will increase a liquidator’s options in seeking to maximise realisations for creditors, which is the primary aim of the liquidation process. Solvent counterparties will now need to tread more carefully in managing post-insolvency matters under the relevant contracts, in order to mitigate the risk of claims being referred by a liquidator to adjudication in the run up to and after insolvency."

The Supreme Court issued its ruling in a case involving a business in liquidation, Bresco Electrical Services, and contractor Michael J Lonsdale.

Lonsdale employed Bresco to complete electrical installation works in 2014. Bresco stopped work under the contract in December 2014, with both companies 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 it.

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

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. It held that when a company goes into liquidation, individual claims are no longer capable of being enforced and are replaced by a single claim, following an account of the mutual debts and mutual dealings between the parties. That single claim is not a dispute under a construction contract, but a calculation under the Insolvency Rules 2016, and therefore an adjudicator has no jurisdiction to hear that claim, the High Court found.

Bresco appealed against the decision of the High Court. Giving the lead judgment in the Court of Appeal, Lord Justice Coulson decided that, technically, an adjudicator has "theoretical jurisdiction" where a dispute is referred to adjudication by a company in insolvent liquidation.

Nevertheless, the injunction to prevent the adjudication was maintained, albeit on different grounds. Lord Justice Coulson did so on grounds of lack of utility, rather than jurisdiction. Looking at earlier case law, he said that it was only in "exceptional circumstances" that a company in insolvent liquidation, and facing a cross-claim, could refer a claim to adjudication, succeed in that adjudication, obtain summary judgment and avoid a stay of execution of enforcement. He concluded that an adjudication held in circumstances in which it would never be enforced was an "exercise in futility" which the court should restrain by way of injunction.

Lord Briggs for the Supreme Court agreed with the Court of Appeal that companies in liquidation have jurisdiction to start adjudication proceedings. Lord Briggs said that the existence of insolvency set off where there is a cross-claim does not mean that there is no longer a claim under the construction contract. He concluded that companies in liquidation should be able to start adjudication proceedings if they have a claim under a construction contract in the same way that they are able to start claims in litigation or arbitration.

However, Lord Briggs disagreed with the Court of Appeal's decision that adjudications started by companies in liquidation do not have utility. Lord Briggs said that adjudications involving companies in liquidation do have utility because in very many cases adjudicators' decisions are not challenged in court and they lead to a speedy, cost effective and final resolution of the dispute.

Lord Briggs also said that companies in liquidation have a statutory and contractual right to start adjudication in relation to claims under a construction contract and that those rights continue to exist when there are cross-claims. It would not be appropriate for the courts to interfere with a company's statutory and contractual right unless in very exceptional circumstances, he said.