Further developments in the interplay between adjudication and insolvency

My colleague, Hannah Sissons, discussed the Court of Appeal’s (CoA) decision in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd (Bresco) in March’s edition of this newsletter, in which the CoA gave much needed guidance on the relationship between the construction adjudication process and insolvency. Briefly, in Bresco, the CoA found that there is an incompatibility between adjudication and the regime set out in the Insolvency Rules 2016. Further, whilst an adjudicator may technically have the necessary jurisdiction to deal with a claim from a party in liquidation, the CoA held that “it is not a jurisdiction which can lead to a meaningful result” – it would only be in exceptional circumstances where judgment would be granted in favour of a company in insolvent liquidation, and so referring a claim in such circumstances (and where there is a cross-claim) would be an “exercise in futility”.

The CoA in Bresco did not deliberate on what such exceptional circumstances might be. However, we now have some clarity on this issue in the form of the judgment handed down by the Technology and Construction Court (TCC) in Meadowside Building Developments Ltd v 12-18 Hill Street Management Company Ltd (Meadowside).

In Meadowside, the defendant employer engaged the claimant contractor to carry out certain repair works pursuant to a JCT Minor Works Building Contract, 2011 Edition. Practical completion was certified on 20 March 2015, and on 25 March 2015 the contract administrator issued a certificate for payment. The contractor was subsequently placed into voluntary winding-up in July 2015. Prior to practical completion and the liquidation, numerous disputes had arisen concerning, inter alia, interim payments, delay, variations and defects. Following several years of correspondence between the defendant and the liquidators for the contractor, a notice of adjudication was issued in February 2018 – the adjudicator found that a net balance of £26,629.63 was due to the contractor, who subsequently sought to enforce payment by way of a summary judgment application.

The TCC discussed the CoA’s decision in Bresco, and then considered whether there is an exception to the general principle that a company in liquidation cannot pursue an adjudication to enforcement.

In summary, the TCC held that a case is “likely” to be an exception to the ordinary position in circumstances where: (1) the adjudication “determines the final net position between the parties under the relevant contract”, and (2) “satisfactory security is provided” both in respect of (i) 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) and (ii) any adverse order for costs made against the company in liquidation in favour of the responding party in respect of both any unsuccessful application to enforce the adjudication and any subsequent litigation or arbitration in which the responding party is seeking to overturn the adjudicator’s decision – further, any agreement providing funding or security “which permits the company in liquidation to avoid the consequences of Bresco cannot amount to an abuse of process”.

The contractor’s application for summary judgment was ultimately refused by the TCC due to the illegitimacy of a funding agreement in place between the claimant and a third party funder, which was deemed “champertous in the eyes of the common law” and unenforceable– the contractor had therefore failed to overcome the “abuse of process” hurdle.

Meadowside provides a useful clarification on the exception to the general rule set out in Bresco. Given the risk of insolvency primarily lies on the supply side of the construction industry, developers can welcome the seemingly stringent tests the courts will adopt in allowing a company in liquidation to pursue enforcement of an adjudication. That said, this is likely to be just the start on this issue and developers should expect the law to evolve in the coming years.

If you require further information about anything covered in this briefing note, please contact Jonathan Came, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2019