Insolvent construction companies are permitted to start adjudication proceedings to resolve disputes with contractors the Supreme Court has ruled. The decision paves the way for more adjudications by administrators of businesses forced into administration by the consequences of the Covid-19 pandemic.
The ruling settled a long-running dispute about whether the adjudication process is compatible with insolvency proceedings in cases where both parties have claims against each other.
The case involved Bresco Electrical Services Ltd, which had been appointed by Michael J Lonsdale (Electrical) Ltd to undertake electrical installation works at the London head office of Rio Tinto in 2014.
After work had been started there was a dispute between the parties and Bresco downed tools in December 2014. Both companies made claims against each other in relation to the work undertaken. Bresco was forced into administration in March 2015 and its administrators started an adjudication to recover the cost of work undertaken before Bresco left the site.
Lonsdale disputed the appointment of an adjudicator, claiming that the dispute should be settled by the liquidator, who would determine the balance of payments owed between the parties under insolvency rules. It argued that if an adjudication went ahead Lonsdale may have then been obliged to pay any award made to Bresco in full, and be faced with recovering any counter claims at a later date.
In the Technology and Construction Court (TCC), the judge ruled in favour of Lonsdale, issuing an injunction to prevent the adjudication from proceeding. At appeal, the judges again ruled that the injunction preventing the adjudication from proceeding should stay in force. The appeal court said that the incompatibility between the adjudication and insolvency regimes would make the adjudication “an exercise in futility”.
The case went to the Supreme Court, which overturned the lower courts’ decisions. The judges ruled that the adjudication could go ahead. Among other reasons, it said that the construction dispute was a separate issue to any claim in insolvency and emphasised that adjudication was a successful method to resolve disputes in its own right.
James Burgoyne, Director – Claims & Technical, Brunel Professions believes that the case will lead to an increase in adjudications by construction companies forced into administration by the Covid-19 crisis. He also sees the Supreme Court’s emphasis on the efficacy of adjudication as being relevant for other situations outside of the construction sector. “Adjudication provides a relatively low cost and quick means to settle construction disputes. However it is likely that administrators will have to ring-fence any awards so that funds are available to settle any subsequent set-off claims, rather than paying them straight out to creditors,” he said.
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