The Supreme Court has ruled on the importance of adjudication and its viability as an option for a company in insolvency to resolve any disputes it may have with its creditors in the construction industry. This is irrespective of whether there is a tenable cross-claim to set-off the amount claimed by the insolvent company. However, a small caveat, the Supreme Court held adjudication should be used in collaboration with insolvency procedures as a way to improve the insolvency process.
The parties entered into a sub-subcontract to carry out electrical installation work at 6 St James’s Square, London, SW1;
Lonsdale employed Bresco to carry out the sub-subcontract works;
Bresco stopped attending site in December 2014 as the contract had been terminated as a result of a repudiatory breach;
Bresco went into creditors’ voluntary liquidation in March 2015;
Claims were made by both Bresco and Lonsdale for repudiatory breach of contract;
Lonsdale claimed for around £325,000, Bresco claimed around £219,000;
Bresco started an adjudication on 18 June 2018. Lonsdale responded by saying the adjudicator lacked jurisdiction due to the issue of insolvency set-off.
Ruling and key observations
Lord Briggs held and observed that:
Adjudication is a contractual and statutory right and this should not be hindered, even if the company bringing the adjudication has gone into liquidation. At paragraph 22 it was held “that (contractual and statutory) right is conferred upon every legal person who or which is, or was, a party to a construction contract (as defined). There is no exclusion of particular types of person, such as a company in liquidation”.
An adjudication can be commenced by a liquidator if it is the best way of resolving a dispute.
Under rule 7.108(4)(a)(ii), liquidators are allowed to engage in Alternative Dispute Resolution (‘ADR’) and can account for the costs associated with these processes as part of their fees. Adjudication, being a form of ADR, should be included.
Any defence can be raised by a responding party, including cross-claim as a way of set-off. Lord Briggs also mentions that it would be within the adjudicator’s prerogative, if a cross-claim for set-off is raised, to dismiss the claim and make a declaration as the value of the cross-claim; but this is not a reason to dismiss the ability of the adjudicator to hear the claim in the first place.
Paragraph 59 “it would ordinarily be entirely inappropriate for the court to interfere with the exercise of that statutory and contractual right. Injunctive relief may restrain a threatened breach of contract but not, save very exceptionally, an attempt to enforce a contractual right, still less a statutory right”.
A pivotal observation can be found at Paragraph 61 “The process of proof of debt in insolvency shares many of the attractive features of adjudication, in terms of speed, simplicity, proportionality and economy, but adjudication has the added advantage that a construction dispute arising during an insolvency will be more amenable to resolution by a professional construction expert than by many liquidators.”
That liquidators and adjudicators can collaborate during the insolvency process was also accepted at paragraph 63: “The adjudicator’s resolution of the construction dispute referred by the liquidator may be of real utility to the conduct of the process of set-off within the insolvency process as a whole”.
The cost-effectiveness and efficiency of adjudication and the decision process, were cited as reasons not to automatically allow injunctive applications. Lord Briggs observed that an adjudication is likely to be significantly less expensive and dealt with more quickly than an application for injunctive relief being heard before the court.In summary: it was held that the adjudication should be allowed, because it is a statutory and contractual right which should not be interfered with by the courts. The fact that the adjudicator is an expert in construction disputes means that adjudication can help the liquidator; and should not be seen as a hindrance.
Adjudication moving forward?
The significance of this case is that it reinforces the court’s confidence in adjudication as a process. It has made it clear that adjudication is a right bestowed on a party by contract and the court should rarely, if ever, interfere with a party’s right to adjudicate. Parties can be assured that as long as they follow the procedure set out in their contract, the Scheme for Construction Contracts 1998 and/or the Construction Act 1996 then they should not be fearful of the potential court sanctions.
You could be forgiven, when reading this judgment, in thinking that there is a slight paradox in the reasoning of his Lordship. Lord Briggs discusses the fact that adjudication is a more cost-effective way of resolving a dispute but then, in the same breath, says that an adjudication can still be brought even if insolvency set-off will be decided as a valid defence to a claim by the adjudicator. So why not just allow the liquidator to make this decision in the first place and save costs for both parties? Although adjudication is certainly cheaper than bringing a formal claim, there are still costs involved.
However, as Lord Briggs explains, the adjudicator is in a better position to understand the issues involved in a construction dispute. The adjudicator should have vast experience, and they should come from a variety of professional backgrounds. If you want someone who understands the structural integrity of a building, then you can have a structural engineer as adjudicator. If you want someone who understands cash flow and issues around money, then you will want a quantity surveyor as your adjudicator, etc.
It is also interesting to note that Lord Briggs, at paragraph 15 of the judgement, mentions a statistic suggested by David Adamson (in an article by Joey Gardner titled “Latham’s report: did it change us?” from Building.co.uk on 27 June 2014 https://www.building.co.uk/focus/lathams-report-did-it-change-us/5069333.article) that only 2% of all adjudication decisions have been challenged in the courts. It is clear that, from the outset, Lord Briggs was making it clear to us that adjudication should be seen as a process in its own right and we should not base its merits on what a court may think of it. This is because adjudication was created as a form of ADR which was meant to have minimal, if any, interference from the court. The decision to refer a matter to adjudication should be done irrespective of if in the, apparently unlikely, event that an adjudicator’s decision may be challenged. Lord Briggs is clearly emphasising the fact that adjudication is a process which is meant to be a cheaper way of resolving a dispute without needing to engage in prolonged and expensive litigation or other forms of ADR which may not understand the intricacies of the construction industry.
Adjudication can complement the insolvency process, not hinder it. A liquidator should be confident that, in the case of a dispute which involves anything related to a construction project and which they are uncertain about, they can clarify the position on this matter with someone who has expertise in what can be a complex and complicated area.
Ultimately, the issue is that courts should not interfere with the ability of parties to pursue a claim against each other because of the contractual and statutory power which adjudication wields.
It is also interesting that Lord Briggs stated that adjudication, and the jurisdiction of the adjudicator, should be given a wide meaning and, at paragraph 41, “Parliament considered that construction adjudication was such a good thing that all parties to such contracts should have the right to go to adjudication points if anything in the opposite direction (from giving it a narrow meaning)”.
Adjudication as a process, like it’s counterpart the Technology and Construction Court, is always at the forefront of technological innovation and is well-known for usually operating entirely online. This fact is likely to have influenced Lord Briggs’ judgment, as adjudication is well equipped to resolve disputes in general and during the COVID-19 lockdown.
This judgment can be seen as part of an ever-growing trend to encourage parties to resolve disputes without resorting to bringing formal court claims. Those of us who are involved with adjudication know that one can refer, or respond, to an adjudication without even knowing what the adjudicator sounds like, never mind looks like. Adjudication has embraced technology, and it is possible to determine whether a party is owed thousands of pounds through a procedure conducted entirely online. This judgment by the Supreme Court was an apt opportunity to emphasise the point that ADR should be the first, second and third option before court proceedings are started. Adjudication, at least in the construction context, is seen as a preferable form of ADR.
Ultimately, it could be said that this decision reinforced the fact that an adjudicator’s ability to hear an adjudication should only be challenged if there is a genuine jurisdictional challenge (e.g. there is a breach of natural justice or there may be a conflict of interest). You can find out more about how to challenge an adjudicator’s jurisdiction in our ‘adjudication – something for everyone’ webinar and news article: https://www.bartonlegal.com/site/news/adjudication-something-for-everyone.
If you need advice on an adjudication and how the adjudication procedure works, you can call us on +44(0)113 202 9550, or alternatively you can contact us by email email@example.com or visit us at 12 New Road Side, Rawdon, Leeds, LS19 6HN.