Is adjudication the new litigation?
10 June 2020
Emily Thomas explores recent case law relating to adjudication ahead of a landmark judgment in the Supreme Court.
Insolvencies in the construction industry are on the increase but, due to historic difficulties in insolvent companies enforcing adjudication decisions, there has previously been some doubt as to whether or not an adjudicator has jurisdiction to make a decision if the referring party was insolvent.There have been several recently published decisions examining the interaction between insolvency and adjudication in this fast-developing area and we await the decision of the Supreme Court in the appeal of the leading case of Bresco v. Lonsdale  EWCA Civ 27, which is expected to be handed down this summer.In advance of that judgment, it is helpful to consider the decisions to date.
Adjudication alongside insolvency.
In Bresco, the Court of Appeal found that an adjudicator did have jurisdiction to hear a dispute involving an insolvent company. However, owing to the basic and fundamental incompatibility between adjudication and insolvency, the court considered that any decision made in favour of a company in insolvent liquidation would not be enforced by a court. Therefore, save for exceptional circumstances, commencing adjudication was deemed to be an 'exercise in futility'.
We then had a decision from the Technology and Construction Court in Meadowside v. Hill Street  EWHC 2651 (TCC), where the court further clarified the options for liquidators seeking payments from solvent companies through adjudication and outlined the circumstances in which it would be prepared to allow the enforcement of an adjudication decision.Firstly, the extent to which the adjudication resolves all claims and cross claims, so that it determines the final net position between the parties under the relevant contract, will influence the court in deciding whether the adjudication award can be enforced.Secondly, appropriate security must be provided in respect of both the adjudication award and any adverse costs order in the enforcement proceedings and subsequent litigation. In respect of the adjudication award, this can be done by the liquidator ring-fencing any sums paid to the company in liquidation to enable the respondent to commence proceedings to overturn the adjudicator's decision. Alternatively, this can be done by providing a bank guarantee or cash deposit. In respect of adverse costs, an after-the-event (ATE) insurance policy can be put in place to cover any adverse costs should an application to enforce the adjudicator's decision be unsuccessful or should the adjudicator's decision be successfully appealed.In Meadowside, the court found that the funding agreement in place, while not disclosed, had a reasonable prospect of breaching the Damages-based Agreement Regulations 2013. This was a factor in the court refusing to enforce the decision by way of summary judgment.
Adjudication and liquidation
The latest decision was in February 2020 where Mr Justice Waksman's decision in Balfour Beatty v. Astec Projects Limited (in liquidation)  EWHC 796 provided further clarity on when parties in liquidation may be able to adjudicate. This was the first time since the Court of Appeal decision in Bresco that an injunction to prevent a company in liquidation from bringing an adjudication had come before the court.One hurdle was that Astec sought to pursue three separate liquidation adjudications in respect of three sub-contracts to ascertain the 'net balance' pursuant to rule 14.25 of the Insolvency (England and Wales) Rules 2016. However, Balfour Beatty took the position that Astec, as a company in liquidation, was prevented from issuing those adjudications.Waksman J held that despite the prior case law not having considered multiple contracts, the fact that there would be three adjudications dealing with three contracts did not prevent them from taking place and therefore declined Balfour Beatty's application for an injunction. It appears that an important factor was the fact that the works all related to the same site.Turning to the security requirements initially set out in Meadowside, Astec had put in place ATE insurance policies (arranged by TheJudge) and ring-fencing undertakings prior to the adjudications being issued against Balfour Beatty. While some amendments to the insurance policies were required, the security provisions were ultimately found to be sufficient to meet the conditions.
An alternative to litigation?
The recent cases show the significant shift in the court's approach towards being more supportive of such adjudications, which will be a welcome development for IPs, as the adjudication process is generally a more efficient, quicker and cheaper alternative to litigation. However, the security conditions set out in Meadowside and imposed in Astec can be onerous. We therefore await the Supreme Court decision in Bresco to provide further clarity and to determine whether IPs should have to put these extra mechanisms in place. Given that the current climate is unfortunately likely to produce an increase in contractor and subcontractor insolvencies, the timing of the judgment will be particularly helpful to give IPs clear guidance on future options.Advertorial
Emily Thomas is the Head of Broking for TheJudge Global, one of the longest-established and most well-known and trusted brands in the litigation insurance and litigation funding market.