Disputes in construction are commonly resolved using the adjudication process – and that method is now being allowed again in situations where one of the affected parties is in liquidation.
The Supreme Court recently made a landmark ruling on a case involving two electrical companies – Bresco v Lonsdale – to allow an insolvent business – in this case, Bresco – to use the adjudication process as a way to pursue a claim against a second party, Lonsdale.
The facts of the case
- Lonsdale had contracted Bresco to carry out electrical works. Both parties claimed the other had made a repudiatory breach of contract - when a party cannot, or is unwilling to, fulfil their obligations.
- Bresco went into liquidation but still continued with its claim against Lonsdale and referred it to adjudication.
- Lonsdale raised court proceedings in an attempt to stop the adjudication going ahead. An injunction was granted at first instance and then upheld in the Court of the Appeal.
- Bresco appealed once again to the Supreme Court.
- Jurisdiction
- Futility
- Court interference. The Court affirmed the idea that court interference in adjudication proceedings should be kept to an absolute minimum. Injunctions should be used to prevent adjudication only in exceptional circumstances. The intention behind the Construction Act is for parties to a construction contract to have constant access to the adjudication process to resolve disputes. If at all, the Court's interference should be at the back-end of the process when enforcement is sought, rather than preventing the adjudication from going ahead at all.
- The merits of adjudication. Cashflow is paramount in the construction industry. "Pay now argue later" has long been the motto of the Construction Act's adjudication mechanism. However, the Court emphasised that the adjudication process is not just about ensuring cashflow. It has become a dispute resolution process in its own right and to its own ends. Just because an adjudication wouldn't have a quick cash result, does not make it pointless.
The main arguments
The Supreme Court decision addressed two main arguments made by Lonsdale.
Firstly, Lonsdale argued that because Bresco was in liquidation, the claims and cross-claims between the parties would automatically be "set-off" against one another, meaning that there would now only be a claim for the balance of those two sums. This net sum would not fall within the scope of an adjudicator's jurisdiction in terms of the Housing, Construction and Regeneration Act 1996 (the Construction Act).
This argument had been successful at first instance, but was then rejected in the Court of Appeal.
Secondly, Lonsdale also argued that the injunction should be upheld to prevent a "futile" adjudication, the result of which was unlikely to be enforced and would waste court time and the parties' money. Equally, if an award in favour of Bresco was enforced, and Lonsdale raised a further action to challenge the award and was successful, there was a significant risk that the sums that had been paid could not be recovered.
This argument was successful in the Court of Appeal.
The Supreme Court decision
Bresco appealed against the Court of Appeal's decision on the futility point, and Lonsdale cross-appealed against its decision on the jurisdiction point.
The Supreme Court rejected both the jurisdiction and futility arguments, allowing Bresco's appeal and so lifting the injunction that prevented the adjudication process from going ahead.
On the jurisdiction argument, the Court concluded that the "set-off" rules in the insolvency regime did not mean that a party in liquidation would no longer be able to refer a dispute to adjudication under the Construction Act. The Court made clear that it did not consider these two regimes to be incompatible.
In response to the futility argument, the Court made clear that injunctive relief would only be used to restrain the referral of a dispute to adjudication in exceptional circumstances. Injunctive relief should be used to "restrain a threatened breach of contract", and only very rarely to stop a party exercising a right, such as its right to adjudicate under the Construction Act.
The importance of adjudication for construction contract disputes
As well as providing specific guidance on the relationship between insolvency and adjudication proceedings, the Court also provided a more general steer on some fundamental points underlying the Construction Act.
Adjudication proceedings– a fast and cheap option for insolvency practitioners?
This Supreme Court ruling has now opened the doors for insolvent parties to raise adjudication proceedings. This could see an increase in insolvency practitioners adopting this particular method of alternative dispute resolution as a quick and relatively cheap way to value the claims of liquidated construction firms.
However, it's worth remembering that the adjudicator's decision is only the first step – the real fight will still be in getting the court to enforce an insolvent party's award.
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