Insolvent Claimants and the right to adjudicate in Construction Contracts

Insolvent Claimants and the right to adjudicate in Construction Contracts

In September 2010 the Society of Construction Law published a paper called Using Adjudication to Resolve Disputes when one of the Parties is Insolvent (D112). Those of you with long memories may recall that I was the author of that paper. I wrote the paper out of academic interest and because at the time my firm was acting for a significant number of Administrators and Liquidators of claimant companies in disputes where Respondents were effectively taking advantage of our client’s insolvent status to deny our clients the right to payment of sums properly due to them.
 

I recall spending a significant amount of time pouring over court judgements to try and figure out whether it would be possible to pursue claims in adjudication when a party was the subject of a formal insolvency arrangement prescribed by the provisions set out in Section 130 (2) of The Insolvency Act 1996 and Paragraph 43 of Schedule 16 to The Enterprise Act 2002. The conclusion I reached, as set out in the paper, said as follows:  

Summary and Conclusions

Only very special circumstances will justify an action in adjudication against a company that is in administration or liquidation and permission is required before an action can be commenced.

Unless the claimant is the subject of an approved Company Voluntary Arrangement, adjudication on behalf of companies that are the subject of a formal insolvency arrangements are unlikely to be successful in applications to enforce Adjudicator’s Decisions. 

Adjudication is designed to be a quick and inexpensive method of arriving at a temporary result in a construction dispute.  As a consequence, Adjudicator’s Decisions are intended to be enforced summarily and a claimant, being the successful party in the adjudication, should not generally be kept out of its money.

In an application to stay the execution of summary judgement arising out of an adjudicator’s decision the court must exercise the discretion it has under the Civil Procedure Rules with the above considerations firmly in mind.  

The probable inability of the claimant to repay the sum awarded by the adjudicator may constitute ‘special circumstances’ within the meaning of the Civil Procedure Rules rendering it appropriate to grant a stay.  

If the claimant is in insolvent liquidation, or there is no dispute on the evidence that the claimant is insolvent, then a stay of execution will usually be granted.  

Even if the evidence of the claimant’s financial position suggests that it is probable that it would be unable to repay the judgement sum when it falls due, that would not usually justify the grant of a stay if (a) the claimant’s financial position is similar to its financial position at the time the relevant contract was made, or (b) the claimant’s financial position is due to the defendant’s failure to pay monies awarded by the adjudicator.

A lot has happened in the last 11 years and the law has developed dramatically to a point where it is now entirely possible to pursue claims in adjudication and even more importantly to get any subsequent decision enforced and money handed over. 

In order to set the scene of where we are today, there are a couple of important cases that are worthy of consideration 

On 17 June 2020 the Supreme Court handed down its judgment in Bresco Electrical Services Ltd (In Liquidation) (Appellant/Cross-Respondent) v Michael J Lonsdale (Electrical) Ltd (Respondent/Cross-Appellant) [2020] UKSC 25 on appeal from [2019] EWCA Civ 27.

This case is of fundamental importance to the UK Construction Industry because it deals with what many people regarded a clash and incompatibility of the adjudication regime and insolvency law. 

The dispute between Bresco and Lonsdale has an interesting history. It has experienced an adjudication in 2018, a visit to the Technology and Construction Court in the same year, a visit to the Court of Appeal in 2019 before the Supreme Court issued its judgement.  

Background 

In 2014 Bresco entered into a sub-sub-contract with Lonsdale to undertake electrical works on a project in London. In March 2015, Bresco entered into liquidation. By the time Lonsdale completed Bresco’s outstanding work a substantial row had broken out. Bresco claimed that it was owed in the region of two hundred and twenty thousand pounds for work done up to termination of the sub-sub-contract. Lonsdale in turn claimed to be owed in the region of three hundred and twenty thousand pounds from Bresco as the additional costs Lonsdale says it had incurred in completing Bresco’s work. 

Adjudication

In June 2018 Bresco commenced an adjudication to seek a determination of the dispute. Lonsdale immediately raised a jurisdiction challenge arguing that any right to payment under the sub-sub-contract had been replaced by the insolvency rules forming part of the 1986 Insolvency Act. These rules included the mutual rights of set-off of all claims and cross-claims and the ultimate determination of a single sum which may or may not be then due. Lonsdale argued that the Adjudicator lacked jurisdiction to undertake such an exercise. The Adjudicator decided in his non-binding view that he did have jurisdiction to deal with the Parties’ dispute.

The TCC Decision

Unhappy with the Adjudicator’s ruling on jurisdiction, Lonsdale issued Part 8 proceedings in the TCC requesting a declaration from the court that the adjudicator lacked jurisdiction and an injunction to restrain Bresco from pursuing its claim in adjudication. The court decided in favour of Lonsdale finding that, upon the appointment of a liquidator, the disputed claims and cross-claims made by the Parties prior to the liquidation ceased to be capable of enforcement and were replaced with a single debt that had to be calculated pursuant to the insolvency rules. The court decided that an Adjudicator lacked jurisdiction to conduct such a calculation.

The Court of Appeal Judgement 

Undeterred by the TCC judgement, Bresco appealed the decision. The Court of Appeal overturned the TCC judgement deciding there was no rule in law to prevent an insolvent party from pursuing a claim in adjudication. However, the Court of Appeal decided that, as there was little prospect of the Adjudicator’s decision ever being enforced, it upheld the decision of the TCC to grant the injunction restraining Bresco from pursuing its claim in adjudication. It is clear from the judgement that the Court of Appeal concluded that it would be a waste of resources to allow a liquidator to pursue a claim in adjudication and to obtain a decision that was unlikely ever to be enforced. The adjudication, it was decided, would be a futile exercise which would cause both parties to incur unnecessary time and expense.   

The Supreme Court Judgement

Unhappy with the Court of Appeal’s decision to allow the injunction to remain in place, restraining it from pursuing Lonsdale in an adjudication, Bresco appealed to the Supreme Court requesting the court to reverse the decision of the Court of Appeal and to allow it to pursue its claim in adjudication. Lonsdale also cross appealed, requesting the Supreme Court to decide that the adjudicator lacked jurisdiction to continue with the adjudication. 

The Supreme Court, in its judgement, addressed what was said to be an apparent incompatibility between adjudication law and insolvency rules of set-off as identified by the Court of Appeal. 

In a unanimous decision it was held that there is no incompatibility between adjudication law and insolvency rules of set-off. An Adjudicator has jurisdiction to deal with a claim brought by an insolvent party and he or she has the power to investigate and decide upon the merits of claims and cross-claims advanced in the adjudication in order to determine the question put to the adjudicator.

The Supreme Court went on to lift the injunction preventing Bresco from pursuing Lonsdale in an adjudication, finding that both the TCC judgement and Court of Appeal decisions were wrongly decided and Bresco should be allowed to pursue its claim in a forum of its own choice. There were no public policy reasons that should be applied to prevent Bresco from continuing with its adjudication against Lonsdale. 

Summary

It is not only clear that there are now no barriers to prevent an insolvent claimant from pursuing a claim under a construction contract, the Supreme Court considers that Adjudicators are ideally placed to determine the single sum that may or may not be ultimately due after all claims and cross-claims are taken into account.

This judgement provided a resounding endorsement for the adjudication regime and cleared up, once and for all, an area of uncertainty regarding the interplay between adjudication and insolvency law.

However, having the right to adjudicate is one thing, obtaining a decision in your favour is another and then being able to enforce the decision in court is a different proposition entirely.

The Current Position 

There have been a number of unsuccessful attempts made by insolvent claimants in adjudication to enforce decisions in their favour and finally, after a wait of over 22 years, we finally have a decided case on which enforcement of an Adjudicator’s decision has been ordered where the claimant is insolvent.  

Reminding ourselves that adjudication is a process that produces a temporary binding decision that is subject to review either in litigation or, if your contract requires by arbitration, it is hardly surprising that the courts insist on insolvent claimants providing adequate security in the form of a bond, insurance policy or similar security before the court will even consider enforcing an Adjudicator’s decision.

The requirement for the provision of adequate security was set out in Meadowside Building Developments Ltd (in liquidation) v 12-18 Hill Street Management Co Ltd [2019] EWHC 2651 (TCC) in which at paragraph 87 of the judgement, the court set out guidance on what adequate security could well look like. 

“(2) Satisfactory security is provided both:

(a) In respect of any sum awarded in the adjudication and successfully enforced, so that it is repayable should the responding party successfully overturn the decision in litigation or arbitration brought within a reasonable time of the date of enforcement;

(b) In respect of any adverse order for costs made against (or agreed by) the company in liquidation in favour of the responding party in respect of:

(i) Any unsuccessful application to enforce the adjudication decision;

(ii) The subsequent litigation/arbitration, in which the responding party is seeking to overturn the adjudication decision;

The extent to which any such costs order is ordered to be met from the security would be a matter for the Court, insofar as it was not agreed.

(3) What is satisfactory as security in form, duration and amount is a question on the facts in the ordinary way and may be provided incrementally (as it would be, for example, in any security for costs application). A combination of the following solutions might be appropriate:

(a) the liquidator undertaking to the court to ringfence the sum enforced so that it is not available for distribution for the relevant duration;

(b) a third party providing a guarantee or a bond;

(c) ATE insurance.”

In John Doyle Construction Ltd v Erith Contractors Ltd [2020] EWHC 2451 (TCC) the court refused to enforce an Adjudicator’s decision because the claimant failed to provide adequate security. It appears that insolvent claimants had still not learned their lessons. 

However, in Styles & Wood (in administration) v GE CIF Trustees [2020] EWHC 2694 (TCC) handed down on 4 September 2020 His Honour Judge Parfitt decided that the claimant’s offer to ring fence payment of the adjudicator’s decision accompanied by an ATE policy to cover the defendant’s arbitration costs until the arbitrator’s award was issued, was adequate security and summary judgement was granted.

Conclusion 

The right to refer disputes to adjudication under construction contracts was introduced by the Housing Grants, Construction and Regeneration Act 1996 and came into force on 1 May 1998. In that year, along with a number of brave souls, I received my first appointment and issued my very first decision. I prefer not to dwell too much on first few adjudications! Suffice to say that the quality of my decisions and those of other adjudicators have I come a long way since then.

The journey we have been over the last 23 years has been an interesting one.  There can be no argument that adjudication had been anything other an outstanding success.  Adjudication law has developed at an incredible pace and it is no surprise to me that we have now reached the point where all manner and size of construction disputes are routinely decided by adjudicators and their decisions are accepted as a final determination of the disputes. 

The idea that a dispute resolver with detailed knowledge of an industry is the best person resolve disputes between contracting parties is one that goes back to the very origins of mankind. So, from the very early days of adjudication, I was convinced that the process should be used to resolve construction disputes where one of the Parties was insolvent.

My very much loved but long since passed mother used to tell me “that everything comes to those that wait”. I am not sure where she got that idea from and I certainly never believed her, but perhaps she was right all along. The adjudication of disputes where one party is insolvent will, I am confident, become common place and the development of adequate security will ensure enforcement of decision granted in favour of insolvent claimants.

Speaking of which, my friends and colleagues in Gateley Legal have teamed up with a number of insurers to provide security as part and parcel of any legal action taken to ensure enforcement of decisions issued in favour of clients who may also be in Administration or Liquidation. 

Peter Vinden

Gateley Vinden - April 2021