The relationship between Construction Act adjudication and the insolvency regime has not always been the happiest. Thankfully, in the conjoined appeals of Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd; Cannon Corporate Ltd v Primus Build Ltd [2019] EWCA Civ 27; [2019] PLSCS 20, Coulson LJ has tackled that thorny issue.
The problem
On the one hand, rule 14.25 of the Insolvency (England and Wales) Rules 2016 deals with the respective rights of two parties when one becomes insolvent – an automatic set-off of amounts owing against amounts owed occurs, so that the only sum payable is by the party which owed the most. The House of Lords confirmed that this was how rule 14.25 (in fact, rule 14.25’s predecessor under the Insolvency Rules 1986) worked in its landmark decision in Stein v Blake [1996] 1 AC 243.
On the other, section 108 of the Housing Grants, Construction and Regeneration Act 1996 provides that “a party to a construction contract has the right to refer a dispute arising out of the contract for adjudication”. And, ever since Macob Civil Engineering Ltd v Morrison Construction Ltd [1999] All ER (D) 143, the courts have looked to enforce adjudicators’ awards by way of summary judgment except in very limited circumstances.
So, what happens when a party which is insolvent looks to bring a claim and, if successful, apply for summary judgment? Do the Insolvency Rules or the Construction Act prevail?
Legal Notes discussed this issue when considering the first-instance decision of Fraser J in the first of the cases considered in this appeal – Lonsdale v Bresco [2018] EWHC 2043 (TCC) (see “Lord Hoffmann’s legacy to construction”). In that case, the judge granted an injunction stopping Bresco from even commencing an adjudication. Fraser J was influenced by a suggestion in Stein v Blake that insolvency set-off meant that the underlying claim which Bresco was trying to refer to adjudication had “ceased to exist” (a phrase Coulson LJ acknowledged “is not without its problems”).
By contrast, in Primus Build Ltd v Cannon Corporate Ltd [2018] EWHC 2143 (TCC), the second case in this appeal which Judge Waksman QC enforced the adjudicator’s decision and, despite the fact that Primus (the referring party) had entered into a company voluntary arrangement (CVA), enforced the adjudicator’s award in favour of Primus. As Coulson LJ acknowledged: “The unspoken suggestion throughout this appeal was that, since they gave rise to markedly different outcomes, one or other of these judgments must be wrong.”
The solution – Bresco
Coulson LJ upheld both first-instance decisions.
In Bresco, he dealt with the question of whether there was a claim which could be referred to adjudication at all. The judge categorised this as relating to the adjudicator’s jurisdiction.
And, because Lonsdale and Cannon both accepted that rule 14.25 did not mean that the referring parties could not bring the underlying claims in court proceedings or arbitration (and contrary to the judge’s previous finding on this issue in Enterprise Managed Services Ltd v Tony McFadden Utilities Ltd [2009] EWHC 3222 (TCC)), Coulson LJ put a gloss on the problematic language from Stein v Blake and held (overturning Fraser J on this point) that liquidation did not preclude an adjudicator from considering the merits of the underlying claims being set off against one another. Indeed, that needed to happen in order for the correct set-off to apply. As such, and endorsing the decision of Judge Purle QC in Philpott and another v Lycée Francais Charles De Gaulle School [2015] EWHC 1065 (Ch), an adjudicator would have jurisdiction to consider a claim brought by a company in liquidation.
However, the judge held that this “theoretical jurisdiction” did not help Bresco because of what he defined as the “utility argument”: the “basic incompatibility between adjudication and the regime set out in the [Insolvency] Rules”.
The judge felt that incompatibility was most apparent if an insolvent company wins an adjudication, but the responding party has a cross-claim under insolvency set-off. As emphasised in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] EWCA Civ 507, if the responding party had to pay the adjudicator’s award in full but was then to prove its cross-claim, it would be out of pocket since it was likely only to receive (if anything at all) a dividend (of a certain number of pence for each pound owed), whereas it would have paid the referring party the full amount awarded.
Enforcing an adjudicator’s award in favour of an insolvent company where the responding party had a cross-claim would be “an exercise in futility”. While the adjudicator might have technical jurisdiction, it was not one that could lead to a meaningful result. As such, so long as the facts support this outcome as a matter of “practical utility”, and supported by the decision in Twintec Ltd v Volkerfitzpatrick Ltd [2014] EWHC 10 (TCC), Fraser J’s decision to award an injunction was upheld.
The solution – Cannon
Coulson LJ had no difficulty differentiating between a CVA and insolvency. He agreed with Judge Waksman QC (and the decision in Westshield Ltd v Whitehouse [2013] EWHC 3576 (TCC); [2014] 1 EGLR 1) that it was entirely possible for Primus to emerge from the CVA solvent, with all of its debtors paid. Further, and adopting one of the principles in Wimbledon Construction Company 2000 Ltd v Vago [2005] EWHC 1086, a stay of execution of an adjudicator’s award should not be granted where, as here, the evidence suggested that the referring party’s financial difficulties where wholly or significantly due to the responding party’s behaviour.
Finally, Coulson LJ warned against the general and vague reservations of jurisdictional challenges which are all too common in adjudications.
Stuart Pemble is a partner at Mills & Reeve
