Construction Adjudication Cases: Part 4 of 2020

Construction Adjudication Cases: Part 4 of 2020

The Enforcement of Adjudicators’ Awards under the HousingGrants, Construction and Regeneration Act Adjudication Cases

1996: Part 4 of 2020 Kenneth T. Salmon Consultant Solicitor at Slater Heelis LLP

Construction&Engineering

Contents

Page 3

1.. . .Introduction .........................................................................................................................................

Page 4

2. Insolvency set off and the right to adjudicate... .................................................................. Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25

Introduction The Enforcement of Adjudicators’ Awards under the Housing Grants, Construction and Regeneration Act 1996: Part 4 of 2020. Kenneth T. Salmon, Consultant Solicitor, Slater Heelis LLP. This part is dedicated to the landmark judgment of the Supreme Court in the case of Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) handed down on 17 June 2020 and which deals with the tension between the rules on insolvency set off under the Insolvency Act 1986 and the right to adjudicate. The court decided that the need to take an account of mutual debts under the insolvency regime did not deprive an insolvent party of the contractual and statutory right to adjudicate ‘at any time’ a dispute arising under the contract.

Legislation The Act means the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 Pt 8.

The ‘new’ provisions apply to contracts entered into on or after 1 October 2011.

The main regulations are contained in the Scheme for Construction Contracts (England & Wales) Regulations 1998 (the ‘Principal Regulations’).[1] They have been amended by the Scheme for Construction Contracts (England & Wales) (Amendment) (England) Regulations 2011[2] (the ‘new Regulations’). The new Regulations apply only to contracts for construction operations in England entered into on or after 1 October 2011. For earlier contracts the Principal Regulations apply. There are separate regulations for contracts for work in Scotland applicable to contracts made on or after 1 November 2011.[3] The new Regulations apply only to contracts for work in Scotland entered into on or after this date. For earlier contracts the Scheme for Construction Contracts (Scotland) Regulations 1998[4] applies. There are new separate regulations for Wales, applicable to contracts for construction operations in Wales entered into on or after 1 October 2011.[5] A reference to “the Scheme” is to the Principal Regulations for England and Wales, or the Scheme for Scotland, as the context so requires.

[1] Scheme for Construction Contracts (England & Wales) Regulations 1998 (SI 1998/649). [2] Scheme for Construction Contracts (England & Wales) (Amendment) (England) Regulations 2011 (SI 2011/2333). [3] Scheme for Construction Contracts (Scotland) Amendment Regulations 2011 (SI 2011/371). [4] Scheme for Construction Contracts (Scotland) Regulations 1998 (SI 1998/687) (S.34). [5] Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (Wales) Regulations 2011 (SI2011/1715) (W.194).

Insolvency set off and the right to adjudicate: Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25

Lonsdale challenged his jurisdiction on the grounds that the Insolvency Rules (currently rule 14.25 of the Insolvency (England and Wales) Rules 2016 (SI 2016/1024) (the Insolvency Rules) required mutual debts to be set off against one another and only the balance found due either way amounted to a debt capable of founding proceedings. It was said that the several claims and cross-claims ceased to have a separate existence until the account had been taken and thus there could be no dispute before then. Lonsdale went to court for an injunction to restrain the adjudication. The case came on before Fraser J who decided that the adjudicator lacked jurisdiction in effect for the reason that the Insolvency Rules were in conflict with the right of adjudication and the former trumped the latter. He granted the injunction. Bresco appealed to the Court of Appeal (Sir Andrew McFarlane P, King and Coulson LJJ) who reversed Fraser J and held that there was a dispute that could be referred to adjudication. But they went on to decide that the injunction restraining the further conduct of the adjudication should be continued on the basis that, since there could be no enforcement, it would be an exercise in futility and a waste of time and money. Bresco then appealed to the Supreme Court against the continuation of the injunction, while Lonsdale cross-appealed on jurisdiction.

Background:

Bresco was engaged by Lonsdale under a Contract (actually a sub-sub-contract) with an adjudication provision which mirrored s.108 of the Act (the right to adjudicate “at any time”). In December 2014 Bresco ceased to attend the site, alleging much later that it did so by way of acceptance of repudiatory breach of the Contract by Lonsdale. In March 2015 Bresco went into creditors’ voluntary liquidation. Thereafter Bresco acted by its liquidator or from time to time by its agent Pythagoras Capital Ltd which funded the claim against Lonsdale in the liquidation. Each party made claims against the other for breach of the Contract based on repudiatory breach. Lonsdale’s claim included £325,000 odd for the cost of having Bresco’s contracted works done by another contractor. Bresco denied that claim and themselves claimed £219,000 odd for the value of work done, and damages for loss of profits under the Contract. All the claims and cross-claims arose entirely from the Contract with each denying the other’s claim in their entirety. In June 2018 Bresco gave notice of intention to refer a dispute to adjudication, seeking payment of £219,000. Tony Bingham was appointed adjudicator.

(F)utility:

Jurisdiction

Would allowing the adjudication to proceed be ‘an exercise in futility’ as the Court of Appeal decided? Coulson LJ had said that “... a decision of an adjudicator in favour of a company in liquidation, like Bresco, would not ordinarily be enforced by the court. ... in my view, judgment in favour of a company in insolvent liquidation (and no stay), in circumstances where there is a cross-claim, will only be granted in an exceptional case. …” The Court of Appeal had noted that participation in adjudication would involve the waste of limited financial resources by the liquidator. Secondly, it would expose the respondent to the reference to wasting costs in a futile process, where there would be no basis of recovering them even if successful. Thirdly, the respondent would, if the liquidator obtained summary judgment for an excessive amount, have to spend further costs on court proceedings to rectify the position, with doubtful recovery from the company even if successful. Finally, the pursuit by liquidators of adjudication followed by enforcement would put undue pressure on the TCC, to the detriment of solvent court users.

I n summary, the Supreme Court agreed with the Court of Appeal that the adjudicator had jurisdiction. They held that the right to adjudicate at any time was not in conflict with the set-off requirements of the Insolvency Rules. Even when the set off rule applied, Bresco’s claim and Lonsdale’s cross claims continued each to have separate existence such that a dispute over any of them was a dispute that could be referred to adjudication on its own at any time. As a respondent in adjudication could rely on any defence available to it, this included a defence by way of set of cross claims, which the adjudicator as an expert was well placed to decide. Nor, in the opinion of the Court, did that mean there was more than one dispute. Provided the cross claims arose under the contract and were relied on by way of defence, they formed part of the single dispute to be decided. A further justification for allowing the claim to proceed was that whilst adjudication was introduced to solve the cash flow problems that beset the construction industry, preserving cash flow was not the sole objective. Adjudication was designed to be, and more importantly has proved to be, a mainstream dispute resolution mechanism in its own right, producing (anecdotally) de facto final resolution of most of the disputes which are referred to an adjudicator. It had long been emphasised that section 108 of the Act, “at any time”, meant exactly what it said.

The Supreme Court stated as follows:

Disputed cross-claims needed to be resolved as a prelude to a final set-off account where all the claims arise under the same construction contract. Even if they arise under more than one construction contract, the adjudicator would be better placed than most liquidators to resolve them. The Scheme contains provision whereby that may be achieved by consent, and the need to take cross-claims into account as defences (by way of set-off) may well mean that there is in reality one single dispute. It was no answer to the utility (rather than futility) of construction adjudication in the context of insolvency set-off to say that the adjudicator’s decision was unlikely to be summarily enforceable. The court was well- placed to deal with such difficulties as might arise at the summary judgment stage, refusing it in an appropriate case as a matter of discretion, or by granting it, but with a stay of execution. So, no need for an injunction, still less a need to prevent the adjudication from running its speedy course, as a useful means of ADR in its own right. Furthermore summary enforcement would not be inappropriate in every case e.g. no dispute about the cross-claim; claim may be found to exist in a larger amount, so that judgment could be given for the balance. Or the disputed cross-claim is found to be of no substance. Or, if the cross-claim can be determined by the adjudicator, because the claim and cross- claim form part of the same “dispute” under the contract, and the adjudicator is able to determine the net balance.

Adjudication

was

intended

(absent

agreement) to be costs neutral

As a starting point, the insolvent company has both a statutory and a contractual right to pursue adjudication as a means of achieving resolution of any dispute arising under a construction contract to which it is a party. Even if the dispute related to a claim affected by insolvency set-off, it would ordinarily be entirely inappropriate for the court to interfere with the exercise of such rights, save very exceptionally That very steep hurdle was not surmounted in this case. In the context of construction disputes adjudication was always intended to be and has become a mainstream method of ADR, leading to the speedy, cost effective and final resolution of most of the many disputes that are referred to adjudication. That was an end in its own right, even where summary enforcement might be inappropriate or for some reason unavailable As to ‘Incompatibility’ of the adjudication process with the insolvency set-off regime the court had this to say: “There is no basis for concluding that this beneficial means of dispute resolution is incompatible with the insolvency process, or with the requirement to deal with cross-claims in insolvency by set-off, still less an exercise in futility. The process of proof of debt in insolvency shares many of the attractive features of adjudication (speed, simplicity, proportionality and economy) with the added advantage that a construction dispute arising during insolvency could be more amenable to resolution by a professional construction expert than by many liquidators.”

The proper answer to all the above issues about enforcement was to deal with them at the enforcement stage, (if there is one). It may be the liquidator would not seek to enforce the adjudicator’s decision summarily. Or the liquidator may offer appropriate undertakings, such as to ring-fence any enforcement proceedings: see the discussion of undertakings in the Meadowside[1] case. The court offered this comfort to paying parties. “Where there remains a real risk that the summary enforcement of an adjudication decision will deprive the respondent of its right to have recourse to the company’s claim as security (pro tanto) for its cross- claim, then the court will be astute to refuse summary judgment.”

[6] Meadowside Building Developments Limited (In Liquidation) v 12-18 Hill Street Management Co Limited [2019] EWHC 2651 (TCC)

Construction&Engineering Get in touchwith our team formore information:

MatthewGrellier Partner &Head of Construction [email protected] 07753 464 740

Kenneth Salmon Consultant Solicitor [email protected] 07786 702 140

@SlaterHeelisLaw /slaterheelis